SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                          ----------------------------


                                    FORM 8-K


                                 CURRENT REPORT


                     PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934




Date of Report (Date of Earliest Event Reported): October  1997


                       TAKE-TWO INTERACTIVE SOFTWARE, INC.
             (Exact name of registrant as specified in its charter)


          Delaware                     0-29230                   11-3299195
(State or other jurisdiction         (Commission              (I.R.S. Employer
    of incorporation)                File Number)            Identification No.)


   575 Broadway, New York, New York                                 10012
(Address of principal executive offices)                          (Zip Code)


Registrant's telephone number, including area code: (212)941-2988


                                 Not Applicable
           Former name or former address, if changed since last report




<PAGE>


Item 5.  Other Event.

     Pursuant to a Securities  Purchase  Agreement,  dated October 14, 1997, the
Company  issued  and  sold to  Infinity  Investors  Limited,  Infinity  Emerging
Opportunities  Limited and Glacier Capital Limited  (collectively,  the "Funds")
(i) 10%  secured  convertible  notes (the  "Notes") in the  aggregate  principal
amount of  $4,200,000;  (ii) 50,000 shares of Common  Stock,  par value $.01 per
share (the "Grant  Shares");  and (iii) five-year  warrants (the  "Warrants") to
purchase 250,000 shares of Common Stock (the "Warrant Shares")  exercisable at a
price of $6.46 per share.  The net  proceeds to the Company from the sale of the
Notes, Grant Shares and Warrants was $4,007,000.  In addition,  the Company paid
$168,000 and issued 20,000 shares of Common Stock and Warrants to purchase 5,000
shares of Common  Stock to Whale  Securities  Co.,  L.P.  as a fee for  services
rendered in connection  with the  transactions  contemplated  by the  Securities
Purchase Agreement.

     The Notes are secured by a first priority  security  interest in letters of
credit  issued  in  respect  of  purchase  orders  for Wheel of  Fortune(R)  and
Jeopardy!(R)  products designed for Nintendo 64 platform (the  "Products"),  and
are convertible,  at the option of the holder,  at any time commencing  February
28, 1998 into shares of Common Stock (the "Note  Conversion  Shares"),  having a
value of 75% of the lowest  daily  weighted  average  sales  price of the Common
Stock  during a period of fifteen  (15) days prior to  conversion,  subject to a
conversion  limit  (the  "Conversion  Limit")  of 19.9% of the then  issued  and
outstanding  shares of Common Stock of the Company.  In the event that aggregate
Note  Conversion  Shares  and other  securities  issuable  under the  Securities
Purchase  Agreement  exceed the Conversion  Limit, the Company will have 60 days
following notice by the Funds to (i) obtain shareholder approval of the issuance
of such securities or (ii) repay the balance of the Notes.

     The Notes  mature on September  30, 1999.  The Company is required to repay
the Notes prior to maturity under certain circumstances,  including in the event
of a change of control,  a transfer of all or substantially all of the Company's
assets,  a merger or  consolidation  of the Company,  the issuance of securities
exceeding the Conversion  Limit (if shareholder  approval has not been obtained)
or the  failure  of the  Company  to  fulfill  certain  securities  registration
obligations  described below. Notes repaid after February 28, 1998 are repayable
at a premium.  In addition,  the Company is required to prepay the Notes through
payments and collections (including draws under letters of credit) from the sale
of the Products  received by the Company  after  December 31, 1997. In addition,
under certain circumstances  (including in the event the value of the collateral
securing the Notes does not equal or exceed the unpaid  principal  amount of the
Notes),  the Company will be required to establish a lockbox  account into which
all collections related to the products will be deposited.




<PAGE>

     Pursuant to the  Securities  Purchase  Agreement,  the  Company  will issue
additional  Grant  Shares (the  "Additional  Grant  Shares") to the Funds in the
event that the closing bid price of the Common  Stock  during the period  ending
thirty days from the date of effectiveness of a registration  statement covering
the Grant Shares  (adjusted for certain events  specified in the agreement) does
not equal $7.75. In the event that any Additional  Grant Shares are issued,  the
exercise  price  of the  Warrants  will be  adjusted  so that  the  value of the
Warrants  (using a  Black-Scholes  or  similar  model)  equals  the value of the
Warrants as of the closing date.

     The Company  granted to the Funds  registration  rights  covering  the Note
Conversion  Shares,  Grant Shares,  Warrant Shares and  Additional  Grant Shares
(collectively,  the "Securities")  pursuant to a Registration  Rights Agreement.
Under such agreement,  the Company is obligated to file a registration statement
covering  the sale of the  Securities  on or prior to April 14, 1998 and use its
best efforts to cause such  registration  statement to become  effective by June
30, 1998.

     The Company also agreed to certain covenants,  including limitations on the
issuance of securities,  mergers and  acquisitions,  incurrence of indebtedness,
liens, the payment of dividends,  capital expenditures and minimum levels of net
worth.

     The foregoing summary descriptions of the Securities Purchase Agreement and
collateral  documents  are not  necessarily  complete and are qualified in their
entirety by reference to the applicable  documents filed with the Securities and
Exchange Commission as exhibits hereto.


Item 7.  Exhibits

          1.   Securities  Purchase  Agreement,  dated  October 14, 1997, by and
               among the Company and the Funds

          2.   Convertible  Note No. 1,  dated  October  14,  1997,  in favor of
               Infinity Investors Limited

          3.   Convertible  Note No. 2,  dated  October  14,  1997,  in favor of
               Infinity Emerging Opportunities Limited

          4.   Convertible  Note No. 3,  dated  October  14,  1997,  in favor of
               Glacier Capital Limited

          5.   Common Stock Purchase  Warrant,  dated October 14, 1997, in favor
               of Infinity Investors Limited

          6.   Common Stock Purchase  Warrant,  dated October 14, 1997, in favor
               of Infinity Emerging Opportunities Limited

          7.   Common Stock Purchase  Warrant,  dated October 14, 1997, in favor
               of Glacier Capital Limited

          8.   Registration  Rights  Agreement,  dated  October 14, 1997, by and
               among the Company and the Funds




<PAGE>

          9.   Security  Agreement,  dated  October 14, 1997, by and between the
               Company and HW Partners, L.P., as agent for and representative of
               the Funds

          10.  Security  Agreement,  dated  October  14,  1997,  by and  between
               Inventory  Management  Systems,  Inc. and HW Partners,  L.P.,  as
               agent for and representative of the Funds

          11.  Transfer  Agent  Agreement,  dated October 14, 1997, by and among
               the  Company,  the  Funds and  American  Stock  Transfer  & Trust
               Company, as transfer agent.





<PAGE>


                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  amendment  to be signed on its behalf by the
undersigned thereunto duly authorized.


Dated: October ___, 1997

                                        TAKE-TWO INTERACTIVE SOFTWARE, INC.



                                        By   /s/  Ryan A. Brant
                                             -----------------------------
                                             Name:  Ryan A. Brant
                                             Title: Chairman









                          SECURITIES PURCHASE AGREEMENT



                                   dated as of


                                October 14, 1997

                                  by and among


                      TAKE-TWO INTERACTIVE SOFTWARE, INC.,
                                 as the Company,

                                       and

                           INFINITY INVESTORS LIMITED


                                       and

                     INFINITY EMERGING OPPORTUNITIES LIMITED

                                       and

                             GLACIER CAPITAL LIMITED

                                as the Purchasers





<PAGE>



                          SECURITIES PURCHASE AGREEMENT


     AGREEMENT, dated as of October 14, 1997 among Take-Two Interactive Software
Inc., a Delaware corporation (the "Company"),  and INFINITY INVESTORS LIMITED, a
Nevis, West Indies  corporation,  INFINITY  EMERGING  OPPORTUNITIES  LIMITED,  a
Nevis,  West Indies  corporation,  and GLACIER CAPITAL  LIMITED,  a Nevis,  West
Indies corporation (collectively, the "Purchasers").

     The parties hereto agree as follows:


                                    ARTICLE I

                                   DEFINITIONS


     SECTION 1.1.  Definitions.  The following  terms, as used herein,  have the
following meanings:

     "Acceptable  Letters of Credit"  means  letters of credit  under  which the
Company is the sole beneficiary (i) issued by U.S. commercial banks rated P-1 or
better by  Standard & Poors  Ratings  Service,  (ii)  issued to provide  for the
payment of the purchase  price of Products sold by the Company,  and (iii) which
have been assigned to the Purchasers,  with acknowledgment of such assignment by
the issuers of such letters of credit, in form and substance
 satisfactory to the
Purchasers in their sole discretion.

     "Additional Collateral" has the meaning set forth in Section 3.9(b).

     "Additional  Grant  Shares"  shall mean a number of shares of Common  Stock
equal to the product of 50,000 multiplied by the Closing Market Price, with such
amount  divided by the average of the Closing Bid Prices of the Common Stock for
each Trading Day during the Test Period,  and  subtracting  from such result the
number of Grant Shares  issued at the Closing.  The number of  Additional  Grant
Shares issued to the Purchasers shall, however, be subject to the Payment Option
for Additional Grant Shares.

     "Affiliate" means, with respect to any Person (the "Subject  Person"),  (i)
any other Person (a "Controlling  Person") that directly,  or indirectly through
one or more intermediaries, Controls the Subject Person or (ii) any other Person
(other  than the  Subject  Person or a  Consolidated  Subsidiary  of the Subject
Person)  which is  Controlled  by or is under common  Control with a Controlling
Person  (other  than,  in the case of a Subject  Person  that is a  Consolidated
Subsidiary, any other Consolidated Subsidiary of the same Controlling Person).


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<PAGE>

     "Agreement"  means  this  Securities   Purchase   Agreement,   as  amended,
supplemented  or otherwise  modified  from time to time in  accordance  with its
terms.

     "Asset Sale" has the meaning set forth in Section 8.20.

     "Balance Sheet" has the meaning set forth in Section 5.5

     "Balance Sheet Date" has the meaning set forth in Section 5.5.

     "Barclays  Bank Debt" means that certain Debt owed by Take-Two  Interactive
Software Europe Limited,  a wholly-owned  Subsidiary of the Company,  payable to
Barclays Bank in the United  Kingdom,  not to exceed  500,000  pounds  aggregate
principal amount at any time outstanding,  which is secured by certain assets of
Take-Two Interactive Software Europe Limited.

     "Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and
which is maintained or otherwise contributed to by the Company.

     "Benefit Plans" has the meaning set forth in Section 5.7(b).

     "Bridge  Period"  means the time period  commencing on the Closing Date and
ending February 28, 1998.

     "Business  Day"  means any day  except a  Saturday,  Sunday or other day on
which commercial banks in the City of New York are authorized or required by law
to close.

     "Capital  Expenditures"  means  any  expenditure  by  the  Company  or  any
Subsidiary for an asset which will be used in a year or years  subsequent to the
year in which the  expenditure is made and which asset is properly  classifiable
in relevant financial statements as property,  equipment,  improvements or fixed
assets, or a similar type of capitalized asset in accordance with GAAP.

     "Capital Reorganization" has the meaning set forth in Section 11.5.

     "Cash  Equivalents"  means  (i)  securities  issued or  directly  and fully
guaranteed  or insured as to  principal  and  interest  by the United  States of
America or any agency or  instrumentality  thereof (provided that the full faith
and  credit of the United  States of  America  is  pledged in support  thereof),
maturing  within one year of the date of  acquisition,  (ii) time  deposits  and
certificates of deposit of any domestic commercial bank having combined capital,
surplus  and  undivided  profits  of not less  than  $100,000,000  (including  a
domestic  branch of a foreign  bank) whose  outstanding  senior  long-term  debt
securities  are rated,  or that is a wholly owned  Subsidiary  of a bank holding
company whose outstanding senior long-term debt securities are 


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(Take-Two Interactive Software, Inc.)



<PAGE>


rated,  either A- or higher by Standard & Poor's Ratings Service or A3 or higher
by Moody's  Investors  Service,  Inc.,  maturing  within one year of the date of
acquisition,  (iii)  repurchase  obligations with a term of not more than 7 days
for  underlying  securities  of the types  described in clause (i) above entered
into with any bank  meeting the  qualifications  specified in clause (ii) above,
(iv) commercial paper rated at least A-1 or the equivalent thereof by Standard &
Poor's  Ratings  Service  or at least P-1 or the  equivalent  thereof by Moody's
Investors Service,  Inc., maturing within one year after the date of acquisition
and (v) investments in money market funds  substantially all of whose assets are
comprised  of  securities  of the types  described  in clauses (i) through  (iv)
above.

     "Change of Control"  means (i) after the date of this  Agreement any person
or group of persons  (within the  meaning of Sections 13 and 14 of the  Exchange
Act and the rules and  regulations of the Commission  relating to such Sections)
shall have acquired beneficial  ownership (within the meaning of Rules 13d-3 and
13d-5  promulgated by the  Commission  pursuant to the Exchange Act) of 50.1% or
more  of the  outstanding  shares  of  Common  Stock  of the  Company,  or  (ii)
individuals  constituting  the board of  directors  of the  Company  on the date
hereof  (together  with  any new  directors  whose  election  by such  board  of
directors or whose  nomination for election by the  stockholders  of the Company
was approved by a vote of at least 50.1% of the  directors  then still in office
who were either  directors as of the date hereof or whose election or nomination
for election was  previously so approved)  ceases for any reason to constitute a
majority of the board of directors of the Company then in office.

     "Citibank  Debt" means that certain Debt payable to Citibank,  N.A., not to
exceed $250,000 aggregate principal amount at any time outstanding, which may be
secured by certain assets of the Company.

     "Closing" or "Closing  Date" means the date on which all of the  conditions
set forth in  Sections  7.1 and 7.2  shall  have  been  satisfied  and the Grant
Shares,  the Convertible  Notes and the Warrants have been issued by the Company
and the Purchase Price therefore has been paid by the Purchasers.

     "Closing  Bid Price"  shall  mean the  closing  bid price of the  Company's
Common  Stock as reported  by  Bloomberg  L.P.  on the Nasdaq  Market or, if not
reported  by  Bloomberg,  L.P. on the Nasdaq  Market,  as reported by such other
exchange or market where the Common Stock is then traded.

     "Closing Market Price" means the Market Price of the Common Stock as of the
date immediately prior to the Closing.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "Collateral" has the meaning set forth in Section 3.9(a).


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<PAGE>



     "Commission"  means the  Securities  and Exchange  Commission or any entity
succeeding to all of its material functions.

     "Common  Stock" means the common  stock,  $.01 par value per share,  of the
Company.

     "Company"  means  Take-Two  Interactive   Software,   Inc.,  a  corporation
incorporated under the laws of Delaware, and its successors.

     "Company  Corporate  Documents" means the certificate of incorporation  and
by-laws of the Company.

     "Consolidated Net Worth" means at any date the total  shareholder's  equity
which would appear on a consolidated balance sheet of the Company prepared as of
such date.

     "Consolidated  Subsidiary" means at any date with respect to any Person any
Subsidiary or other  entity,  the accounts of which would be  consolidated  with
those of such Person in its consolidated financial statements if such statements
were prepared as of such date.

     "Control" (including,  with correlative meanings,  the terms "Controlling,"
"Controlled by" and under "common  Control  with"),  as used with respect to any
Person, means the possession,  directly or indirectly, of the power to direct or
cause the  direction of the  management  and  policies of that  Person,  whether
through the ownership of voting securities, by contract or otherwise .

     "Conversion Date" shall mean the date of delivery  (including  delivery via
telecopy) of a Notice of Conversion  for all or a portion of a Convertible  Note
by the holder thereof to the Company and the Transfer Agent.

     "Conversion Limit" has the meaning set forth in Section 10.5(c).

     "Conversion  Price"  shall mean the formula  F/P where F = the  outstanding
principal amount of the Convertible Note being converted, and P = 75% multiplied
by the lowest daily weighted average sales price of the Common Stock as reported
by Bloomberg, L.P. (the "DWASP") during the Lookback Period; provided,  however,
commencing  after the first  anniversary of this Agreement the Conversion  Price
shall be the lesser of the foregoing amount and the product of 75% multiplied by
the DWASP during the then applicable  Lookback  Period (the "Maximum  Conversion
Price").

     "Conversion  Shares"  means  the  shares  of  Common  Stock  issuable  upon
conversion of the Convertible Notes.




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(Take-Two Interactive Software, Inc.)



<PAGE>



     "Convertible   Note(s)"   means  the  Company's  10%  secured   convertible
promissory  notes  issuable  at the  Closing  pursuant  to  the  terms  of  this
Agreement, substantially in the form set forth as Exhibit A hereto.

     "Crestar  Debt"  means  that  certain  Debt  owed by  Inventory  Management
Systems,  Inc., a  wholly-owned  Subsidiary  of the Company,  payable to Crestar
Bank, Richmond,  Virginia,  not to exceed $250,000 aggregate principal amount at
any time outstanding, which is secured by certain assets of Inventory Management
Systems, Inc.

     "Deadline" has the meaning set forth in Section 10.3.

     "Debt"  of any  Person  means at any  date,  without  duplication,  (i) all
obligations  of such Person for borrowed  money,  (ii) all  obligations  of such
Person  evidenced by bonds,  debentures,  notes,  or other  similar  instruments
issued by such Person,  (iii) all obligations of such Person as lessee which (y)
are capitalized in accordance with GAAP or (z) arise pursuant to  sale-leaseback
transactions,  (iv) all  reimbursement  obligations of such Person in respect of
letters of credit or other similar  instruments,  (v) all Debt of others secured
by a Lien on any asset of such Person,  whether or not such Debt is otherwise an
obligation of such Person and (vi) all Debt of others Guaranteed by such Person.

     "Default"  means  any  event or  condition  which  constitutes  an Event of
Default  or which  with the  giving of  notice  or lapse of time or both  would,
unless cured or waived, become an Event of Default.

     "Default  Fee"  has  the  meaning  set  forth  in the  Registration  Rights
Agreement.

     "Derivative Securities" has the meaning set forth in Section 10.2.

     "Discounted Equity Offerings" has the meaning set forth in Section 10.2.

     "Directors" means the individuals then serving on the board of directors or
similar such management council of the Company.

     "DWASP" has the meaning set forth in the definition of Conversion Price.

     "Environmental  Laws" means any and all federal,  state,  local and foreign
statutes,  laws, regulations,  ordinances,  rules,  judgments,  orders, decrees,
permits,  concessions,   grants,  franchises,   licenses,  agreements  or  other
governmental   restrictions   relating  to  the  environment  or  to  emissions,
discharges  or releases of  pollutants,  contaminants,  petroleum  or  petroleum
products,  chemicals or industrial, toxic or hazardous substances or wastes into
the  environment,  including,  without  limitation,  ambient air, surface water,
ground water,  or land, or otherwise  relating to the  manufacture,  processing,
distribution,  use,  treatment,  storage,  disposal,  transport 


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<PAGE>



or  handling of  pollutants,  contaminants,  petroleum  or  petroleum  products,
chemicals or industrial,  toxic or hazardous substances or wastes or the cleanup
or other remediation thereof.

     "ERISA"  means the Employee  Retirement  Income  Security  Act of 1974,  as
amended, or any successor statute.

     "ERISA  Group" means the Company and each  Subsidiary  and all members of a
controlled  group of corporations  and all trades or businesses  (whether or not
incorporated)  under  common  control  which,  together  with the Company or any
Subsidiary, are treated as a single employer under the Code.

     "Event of Default" has the meaning set forth in Article XII hereof.

     "Excess Shares" has the meaning set forth in Section 4.1.

     "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     "Financing"  means a  public  or  private  financing  consummated  (meaning
closing and  funding)  through the  issuance  of equity  securities  and/or debt
securities (or securities  convertible into or exchangeable for debt securities)
of the Company.

     "Financing  Documents"  means this  Agreement,  the Warrants,  the Transfer
Agent Agreement,  the Registration Rights Agreement, the Security Agreement, the
Subsidiary Security Agreement and the Convertible Notes.

     "Fixed Price(s)" has the meaning set forth in Section 11.1.

     "Formula  Price" shall mean a dollar amount equal to the product of (x) the
number of  shares of Common  Stock  into  which the  Convertible  Notes are then
convertible at the then  applicable  Conversion  Price and (y) the last reported
sales price of the Common Stock as reported by Bloomberg, L.P. on the applicable
date the Convertible Notes are redeemed as set forth in Section 3.6 hereof, plus
accrued and unpaid interest through the date of repayment.

     "GAAP" has the meaning set forth in Section 1.2.

     "Grant  Shares" means the 50,000 shares of Common Stock to be issued to the
Purchasers on the Closing Date.

     "Guarantee" or "Guaranties" by any Person means any obligation,  contingent
or otherwise,  of such Person  directly or indirectly  guaranteeing  (whether by
virtue of  partnership  arrangements,  by  agreement  to keep well,  to purchase
assets, goods, securities or services, to take-or-pay,  or to maintain a minimum
net worth,  financial ratio or similar  requirements,  or otherwise) any Debt of
any other Person and,  without  limiting the  generality of the  foregoing,  



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(Take-Two Interactive Software, Inc.)



<PAGE>



any obligation,  direct or indirect, contingent or otherwise, of such Person (i)
to purchase or pay (or advance or supply  funds for the  purchase or payment of)
such Debt or (ii)  entered  into for the purpose of assuring in any other manner
the holder of such Debt of the payment thereof or to protect such holder against
loss in respect thereof (in whole or in part);  provided that the term Guarantee
shall not include  endorsements for collection or deposit in the ordinary course
of business. The term Guarantee used as a verb has a corresponding meaning.

     "Hazardous  Materials"  means any hazardous  materials,  hazardous  wastes,
hazardous  constituents,  hazardous or toxic  substances  or petroleum  products
(including  crude  oil  or any  derivative  or  fraction  thereof),  defined  or
regulated as such in or under any Environmental Laws.

     "Intellectual Property" has the meaning set forth in Section 5.19.

     "Investment" means any investment in any Person,  whether by means of share
purchase,  partnership  interest,  capital  contribution,  loan, time deposit or
otherwise.

     "Lien"  means,  any  lien,  mechanic's  lien,  materialmen's  lien,  lease,
easement,  charge,  encumbrance,  mortgage,  conditional  sale agreement,  title
retention  agreement,   agreement  to  sell  or  convey,  option,  claim,  title
imperfection, encroachment or other survey defect, pledge, restriction, security
interest or other  adverse  claim,  whether  arising by contract or under law or
otherwise   (including,   without   limitation,   any  financing   lease  having
substantially  the same economic effect as any of the foregoing,  and the filing
of any financing  statement under the Uniform  Commercial Code or comparable law
of any jurisdiction in respect of any of the foregoing).

     "Limitation on Conversion" has the meaning set forth in Section 10.5(a).

     "Lockbox Event" has the meaning set forth in Section 3.9(b).

     "Lookback  Period" shall mean with respect to each  Convertible  Note,  the
period  commencing on the date the Convertible  Notes are initially  convertible
pursuant to their stated  terms,  a period of fifteen (15) Trading Days prior to
the Conversion Date, increasing by two (2) Trading Days each thirty (30) Trading
Days  thereafter,  up to a maximum of thirty-one  (31) Trading Days prior to the
Conversion Date.

     "Majority  Holders"  means (i) as of the Closing Date,  the  Purchasers and
(ii) at any time thereafter, the holders of more than 50% in aggregate principal
amount of the Convertible Notes outstanding at such time.

     "Market  Price"  shall  mean the  Closing  Bid  Price of the  Common  Stock
preceding the date of determination.


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     "Material Plan" means at any time a Plan or Plans having aggregate Unfunded
Liabilities in excess of $250,000.

     "Maturity Date" shall mean September 30, 1999.

     "Maximum  Conversion  Price" has the meaning set forth in the definition of
Conversion Price.

     "Maximum Number of Shares" has the meaning set forth in Section 10.5(d).

     "Multiemployer  Plan" means at any time an employee  pension  benefit  plan
within the  meaning of  Section  4001(a)(3)  of ERISA to which any member of the
ERISA Group is then making or accruing an  obligation to make  contributions  or
has within the preceding five plan years made contributions, including for these
purposes  any Person  which ceased to be a member of the ERISA Group during such
five year period.

     "Nasdaq Market" means the Stock Market's SmallCap Division.

     "Nasdaq Redemption Event" has the meaning set forth in Section 3.5(a).

     "National  Bank of Canada Debt" means that certain Debt payable to National
Bank of Canada,  New York Branch,,  not to exceed $800,000  aggregate  principal
amount at any time  outstanding,  which may be secured by certain  assets of the
Company.

     "Net Cash  Proceeds"  means,  with  respect to any  transaction,  the total
amount of cash  proceeds  received  by the  Company or any  Subsidiary  less (i)
reasonable  underwriters' fees, brokerage commissions,  reasonable  professional
fees and other customary  out-of-pocket expenses payable in connection with such
transaction, and (ii) in the case of dispositions of assets, (A) actual transfer
taxes (but not income taxes) payable with respect to such dispositions,  and (B)
the amount of Debt, if any, secured by a Lien on the asset or assets disposed of
and  required to be, and  actually  repaid by the Company or any  Subsidiary  in
connection therewith, and any trade payables specifically relating to such asset
or assets  sold by the  Company or any  Subsidiary  that are not  assumed by the
purchaser of such asset or assets.

     "Note Maturity Date" has the meaning set forth in Section 4.1.

     "Notice  of  Conversion"  means the form to be  delivered  by a holder of a
Convertible  Note upon  conversion  of all or a portion  thereof to the Transfer
Agent and the Company substantially in the form of Exhibit B attached hereto.

     "Notice  of  Exercise"  means  the form to be  delivered  by a holder  of a
Warrant upon exercise of all or a portion  thereof to the Company  substantially
in the form of Exhibit C attached hereto.




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     "Officer's Certificate" shall mean a certificate executed by the President,
chief executive officer or chief financial officer of the Company in the form of
Exhibit G attached hereto.

     "Other Taxes" has the meaning set forth in Section 3.8(b).

     "Par Value Redemption Price" has the meaning set forth in Section 3.4.

     "Payment  Option for  Additional  Grant  Shares" shall have the meaning set
forth in Section 4.1.

     "PBGC"  means  the  Pension  Benefit  Guaranty  Corporation  or any  entity
succeeding to any or all of its functions under ERISA.

     "Permits"  means all domestic and foreign  licenses,  permits and approvals
required for the full operation of the Company and the  Subsidiaries,  including
state, federal, city and county permits and approvals.

     "Permitted Debt" has the meaning set forth in Section 8.8.

     "Permitted  Transferee"  means any Person that  acquires the Grant  Shares,
Additional Grant Shares, Convertible Notes or Warrants, or the Conversion Shares
or  Warrant  Shares,  in  compliance  with  Article X other  than any Person who
acquires  such  Grant  Shares,  Additional  Grant  Shares,   Convertible  Notes,
Warrants,  Conversion  Shares or Warrant Shares (i) in a public offering or (ii)
in the open market,  pursuant to sales under Rule 144 of the  Securities  Act or
otherwise.

     "Person" means an individual, corporation, partnership, trust, incorporated
or unincorporated  association,  joint venture, joint stock company,  government
(or any agency or political subdivision thereof) or other entity of any kind.

     "Plan"  means at any time an employee  pension  benefit  plan (other than a
Multiemployer  Plan)  which is  covered  by Title IV of ERISA or  subject to the
minimum  funding  standards  under the Code and  either  (i) is  maintained,  or
contributed  to, by any member of the ERISA Group for employees of any member of
the ERISA  Group or (ii) has at any time  within the  preceding  five years been
maintained,  or contributed to, by any Person which was at such time a member of
the ERISA Group for  employees  of any Person which was at such time a member of
the ERISA Group.

     "Products" means the Nintendo versions of Wheel of Fortune (R) and Jeopardy
(R) distributed or sold by the Company.



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<PAGE>




     "Purchase Price" means the purchase price for the Convertible  Notes as set
forth in Section 2.1(d) hereof.

     "Purchasers" means, collectively, those entities listed in the introduction
to this Agreement and their successors and assigns,  including holders from time
to time of the Convertible Notes.

     "Qualified  Financing" shall mean any issuance of debt or equity securities
of the Company that is not prohibited pursuant to the terms of this Agreement.

     "Registrable Securities" has the meaning set forth in Section 10.1.

     "Registration Default" has the meaning set forth in Section 10.1(e).

     "Registration  Maintenance  Period"  has  the  meaning  set  forth  in  the
Registration Rights Agreement.

     "Registration Statement" has the meaning set forth in Section 10.1(b).

     "Registration Rights Agreement" means the agreement between the Company and
the  Purchasers  dated the date  hereof  substantially  in the form set forth in
Exhibit D attached hereto.

     "Reimbursement Fee" has the meaning set forth in Section 13.4.

     "Required Effectiveness Date" has the meaning set forth in the Registration
Rights Agreement.

     "Restricted Payment" means, with respect to any Person, (i) any dividend or
other  distribution  on any  shares  of  capital  stock of such  Person  (except
dividends  payable solely in shares of capital stock of the same or junior class
of such Person and dividends from a wholly-owned  direct or indirect  Subsidiary
of the  Company to its parent  corporation),  (ii) any payment on account of the
purchase,  redemption,  retirement  or  acquisition  of (a) any  shares  of such
Person's  capital  stock or (b) any  option,  warrant or other  right to acquire
shares of such  Person's  capital stock or (iii) any loan, or advance or capital
contribution  to any Person (a  "Stockholder")  owning any capital stock of such
Person other than relocation,  travel or like advances to officers and employees
in the ordinary course of business.

     "Revaluation Date" shall mean the date on which the Registration  Statement
is declared effective by the Commission.

     "Revolving  Credit  Debt"  means  any  borrowing  by the  Company  under  a
revolving credit working capital facility, provided the full amount of Debt owed
thereunder  is required to be, and is,  reduced to zero for at least thirty (30)
consecutive days during each calendar year.




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     "Rights Offering" has the meaning set forth in Section 11.3.

     "SEC Reports" shall have the meaning set forth in Section 5.5.

     "Securities" means the Grant Shares,  Additional Grant Shares,  Convertible
Notes,  Warrants  and,  as  applicable,  the  Conversion  Shares and the Warrant
Shares.

     "Securities Act" means the Securities Act of 1933, as amended.

     "Security  Agreement"  means the  agreement  between  the  Company  and the
Purchasers dated the date hereof  substantially in the form set forth in Exhibit
K attached hereto.

     "Share Note" has the meaning set forth in Section 4.1.

     "Share Reorganization" has the meaning set forth Section 11.2.

     "Solvency  Certificate"  shall  mean a  certificate  executed  by the chief
financial officer of the Company as to the solvency of the Company, the adequacy
of its capital and its ability to pay its debts which such Solvency  Certificate
shall be in the form of Exhibit F attached hereto.

     "Special Distribution" has the meaning set forth in Section 11.4.

     "Subsidiary"  means,  with respect to any Person,  any corporation or other
entity of which a majority of the  capital  stock or other  ownership  interests
having  ordinary  voting  power to elect a majority of the board of directors or
other  persons  performing  similar  functions  are  at  the  time  directly  or
indirectly owned by such Person. Unless specified to the contrary,  "Subsidiary"
means a Subsidiary of the Company.

     "Subsidiary  Corporate  Documents"  means the certificates of incorporation
and by-laws of each Subsidiary.

     "Subsidiary  Security  Agreement" means the agreement between the Company's
wholly-owned Subsidiary,  Inventory Management Systems, Inc., and the Purchasers
dated as of the date  hereof  substantially  in the form set forth in  Exhibit L
attached hereto.

     "Taxes" has the meaning set forth in Section 3.8.

     "Test   Period"  means  the  period  ending  thirty  (30)  days  after  the
Revaluation Date.

     "Trading  Day" shall mean any  Business  Day in which the Nasdaq  Market or
other automated  quotation  system or exchange on which the Common Stock is then
traded is open for trading for at least four (4) hours.



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     "Transfer" means any disposition of Securities that would constitute a sale
thereof under the Securities Act.

     "Transfer  Agent" means the Company's stock transfer  agent;  specifically,
American Stock Transfer & Trust Company.

     "Transfer Agent  Agreement" means the agreement dated the date hereof among
the  Company,  the  Transfer  Agent and the  Purchasers,  dated the date  hereof
substantially in the form set forth in Exhibit H attached hereto.

     "Unfunded  Liabilities"  means,  with respect to any Plan at any time,  the
amount (if any) by which (i) the present  value of all benefits  under such Plan
exceeds (ii) the fair market value of all Plan assets allocable to such benefits
(excluding any accrued but unpaid contributions),  all determined as of the then
most  recent  valuation  date for such Plan,  but only to the  extent  that such
excess  represents  a potential  liability of a member of the ERISA Group to the
PBGC or any other Person under Title IV of ERISA.

     "Warrants"  means  the  Common  Stock  Purchase   Warrants  issued  to  the
Purchasers  on the  Closing  Date in the form of  Exhibit I hereto  to  purchase
250,000 shares of Common Stock (subject to adjustment as set forth therein).

     "Warrant Shares" means the shares of Common Stock issuable upon exercise of
the Warrants.

     "Whale" means Whale Securities Co., L.P.

     "Whale Warrants" has the meaning set forth in Section 2.2(e).

     SECTION  1.2.  Accounting  Terms  and   Determinations.   Unless  otherwise
specified  herein,  all accounting  terms used herein shall be interpreted,  all
accounting  determinations hereunder shall be made, and all financial statements
required  to be  delivered  hereunder  shall be  prepared,  in  accordance  with
generally accepted accounting principles as in effect from time to time, applied
on a  consistent  basis  (except  for  changes  concurred  in by  the  Company's
independent public accountants) ("GAAP");  provided that if the Company notifies
each of the  Purchasers  that it wishes to amend any covenant in Article VIII to
eliminate the effect of any change in GAAP on the operation of such covenant (or
if any of the  Purchasers  notify the Company that the Majority  Holders wish to
amend Article VIII for such purpose),  then the Company's  compliance  with such
covenant shall be determined on the basis of GAAP in effect  immediately  before
the  relevant  change in GAAP  became  effective,  until  either  such notice is
withdrawn or such  covenant is amended in a manner  satisfactory  to the Company
and the Majority Holders.  All references to "dollars,"  "Dollars" or "$" are to
United States dollars unless otherwise indicated.




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                                   ARTICLE II

                        PURCHASE AND SALE OF SECURITIES 

     SECTION 2.1. Commitment to Purchase.

     (a) Subject to the terms and conditions set forth herein and in reliance on
the  representations  and warranties of the  Purchasers  contained  herein,  the
Company  agrees to issue and sell and,  subject to the terms and  conditions set
forth  herein and in  reliance  on the  representations  and  warranties  of the
Company contained herein, the Purchasers agree to purchase,  on the Closing Date
an aggregate principal amount of $4,200,000 of Convertible Notes.

     (b)  In  connection  with  the   Purchasers'   agreement  to  purchase  the
Convertible  Notes  specified  in this  Article II, the Company  shall issue and
deliver to the Purchasers on the Closing Date (x) the Warrants and (y) the Grant
Shares.

     (c) The portion of the Convertible  Notes,  Warrants and Grant Shares to be
acquired  by each  Purchaser  on the Closing  Date is set forth on Schedule  2.1
attached hereto. 

     (d) The aggregate  consideration  payable by the  Purchasers to the Company
for the Convertible Notes shall be $4,032,000  (representing 96% of the original
principal  amount of the  Convertible  Notes  issued on the  Closing  Date) (the
"Purchase Price").

     SECTION 2.2. Purchase of Securities.

     (a) On the  Closing  Date,  subject  to the  satisfaction  of all terms and
conditions  set forth  herein,  each of the  Purchasers  shall  deliver  by wire
transfer to the Transfer Agent  immediately  available  funds the portion of the
Purchase  Price of the  Convertible  Notes to be purchased by it on such Closing
Date, less the Reimbursement Fee.

     (b) On the Closing Date, against payment as set forth in subsection 2.2 (a)
above, the Company shall deliver to the Transfer Agent (i) a single  Convertible
Note for each Purchaser  representing  the principal  amount of such Convertible
Notes  issued  to such  Purchaser,  (ii) a single  Warrant  for  each  Purchaser
representing the aggregate Warrants issued to such Purchaser, and (iii) a single
shares  certificate  representing  the  aggregate  Grant  Shares  issues to such
Purchaser.

     (c) As  contemplated  by the Transfer  Agent  Agreement,  immediately  upon
receipt  of the  items  specified  in  subsections  2.2 (a) and (b)  above,  the
Transfer Agent shall (i) disburse the Purchase Price in accordance  with Section
1 of the Transfer Agent Agreement, (ii) deliver the 




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<PAGE>




Warrants and Grant  Shares to the  Purchasers  and (iii) retain the  Convertible
Notes for the benefit of the Purchasers, as described therein.

     (d)  As  further  contemplated  by  Section  1(d)  of  the  Transfer  Agent
Agreement,  in lieu of  effecting  the closing of the  purchase  and sale of the
Convertible Notes through the Transfer Agent, the Company and the Purchasers may
directly consummate the deliveries described above.

     (e) The  Company  shall  (x) pay  Whale a cash  fee of 4% of the  principal
amount of Convertible  Notes issued at the Closing and (y) issue (i) warrants to
acquire  20,000  shares of Common  Stock (the "Whale  Warrants")  and (ii) 5,000
shares of Common Stock.  The Whale Warrants and shares of Common Stock issued to
Whale will not be entitled to any of the pricing  reset  features  described  in
this  Agreement  attributable  to the Grant  Shares and  Warrants  issued to the
Purchasers.

                                   ARTICLE III

                       PAYMENT TERMS OF CONVERTIBLE NOTES

     SECTION 3.1.  Payment of Principal and  Interest;  Payment  Mechanics.  The
Company will pay all sums  becoming due on each  Convertible  Note by the method
and at the address  specified  for such purpose set forth in the Transfer  Agent
Agreement.

     SECTION 3.2.  Conversion  at Maturity.  On the  Maturity  Date,  the unpaid
principal balance of each Convertible Note shall automatically be converted into
shares of Common Stock on such date at the then applicable  Conversion Price and
the  Maturity  Date shall be deemed  the  Conversion  Date with  respect to such
conversion  without  the  requirement  of  delivery  of a Notice of  Conversion;
provided,  however,  if on such date an Event of Default exists, such conversion
shall not occur and the remaining balance of each Convertible Note shall be paid
in cash at the Formula Price unless the holder thereof delivers to the Company a
Notice of Conversion.

     SECTION 3.3. Payment of Interest.  Interest shall accrue on the outstanding
principal amount of the Convertible Notes from day to day at the rate of 10% per
annum to be calculated on the basis of a 360-day year. Interest shall be payable
quarterly in cash as specified in each Convertible Note.

     SECTION 3.4. Voluntary  Prepayments.  During the Bridge Period, the Company
may, at its option, repay, in whole or in part, the Convertible Notes at a price
equal to 100% of the aggregate principal amount then outstanding,  together with
all accrued and unpaid  interest  thereon  (the "Par Value  Redemption  Price").
Thereafter,  the Company  may, at its option,  following  thirty (30) days prior
written  notice to the  Purchasers  (the  expiration of such 30 day period being
referred to as the "prepayment date";  provided,  however,  that if such date is
not a  




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Business Day, the  prepayment  date shall be the next  Business Day  thereafter)
prepay all of any portion of the Convertible Notes remaining  unconverted on the
prepayment  date  at the  Formula  Price.  Partial  prepayments  shall  be in an
aggregate principal amount of $100,000 or a multiple thereof.

     SECTION 3.5. Mandatory Repayment.

     (a) Upon (i) the  occurrence of a Change of Control of the Company,  (ii) a
transfer of all or substantially  all of the assets of the Company to any Person
in  a  single   transaction   or  series  of  related   transactions,   (iii)  a
consolidation, merger or amalgamation of the Company with or into another Person
(other  than a  merger  (x)  which  does  not  result  in any  reclassification,
conversion,  exchange or cancellation  of outstanding  shares of Common Stock or
(y) which is effected solely to change the  jurisdiction of incorporation of the
Company and results in a reclassification, conversion or exchange of outstanding
shares of Common Stock solely into shares of Common Stock), (iv) the issuance of
the  Maximum  Number of Shares and the  failure  within  sixty (60) days of such
issuance to obtain  shareholder  approval to issue  additional  shares of Common
Stock as described in Section 10.5(c) (the "Nasdaq Redemption Event") or (v) the
occurrence  of a  Registration  Default  and the  delivery to the Company by the
holders of the Convertible  Notes of a notice  demanding that the Company redeem
such Convertible  Notes, then, in each case, the Company shall redeem all of the
Convertible Notes for cash. If such redemption occurs prior to the expiration of
the Bridge Period,  the redemption price shall be Par Value Redemption Price. If
such redemption occurs after the expiration of the Bridge Period, the redemption
price shall be the Formula Price.

     (b)  Upon the  consummation  of any  Discounted  Equity  Offering  or other
Financing that is not a Qualified Financing,  the Company shall use the Net Cash
Proceeds  therefrom to redeem the Convertible Notes for cash. If such redemption
occurs prior to the expiration of the Bridge Period,  the redemption price shall
be Par Value Redemption Price. If such redemption occurs after the expiration of
the Bridge Period, the redemption price shall be the Formula Price.

     (c) The Company  shall be required  to prepay the  Convertible  Notes in an
amount  equal  to  all  payments  and  other  collections  (including,   without
limitation  pursuant to draws under letters of credit  constituting  Collateral)
received  by the Company  after  December  31, 1997 with  respect to the sale of
Products immediately upon the receipt of such payments and collections.  Amounts
received by Purchasers  after  December 31, 1997 pursuant to draws under letters
of credit constituting Collateral shall be applied to payment of the Convertible
Notes. If such  redemption  occurs prior to the expiration of the Bridge Period,
the redemption  price shall be Par Value  Redemption  Price.  If such redemption
occurs after the expiration of the Bridge Period,  the redemption price shall be
the Formula Price.



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     SECTION 3.6. Prepayment Procedures.

     (a) Any  prepayment  or  redemption of the  Convertible  Notes  pursuant to
Sections 3.4 or 3.5 above shall be deemed to be effective and  consummated  (for
purposes of determining the Formula Price,  and the time at which the Purchasers
shall  thereafter  not be  entitled  to deliver a Notice of  Conversion  for the
Convertible Notes) as follows:

          (I) A  prepayment  pursuant to Sections  3.4,  the  "prepayment  date"
     specified therein;

          (II) A redemption pursuant to Section 3.5(a), the date of consummation
     of the applicable Change of Control, merger, asset sale, or delivery of the
     notice specified following the Registration Default;

          (III)  A  redemption   pursuant  to  Section   3.5(a),   the  date  of
     consummation  of  the  applicable   Discounted  Equity  Offering  or  other
     Financing; and

          (IV) A redemption  pursuant to Section 3.5(c), the date of the receipt
     by the Company of the proceeds of the sales of Products.

     (b) Within one (1) Business Day after (x) the Maturity Date (if applicable)
or (y) the effective date of a repayment or redemption of the Convertible Notes,
the Company shall  deposit the  applicable  repayment/redemption  price with the
Transfer Agent for immediate delivery to each Purchaser of the Convertible Notes
subject  to  redemption  as  contemplated  by  the  Transfer  Agent   Agreement.
Notwithstanding those procedures set forth in the Transfer Agent Agreement,  the
Purchaser may authorize the Company to pay all amounts due under the Convertible
Notes  directly to the  Purchasers,  followed by notice of the amount so paid to
the Transfer Agent.  Should any Purchaser not receive payment of any amounts due
on redemption  of its  Convertible  Notes by reason of the Company's  failure to
make payment at the times prescribed above for any reason, the Company shall pay
to the applicable holder on demand (x) interest on the sums not paid when due at
an annual  rate equal to the lesser of (I) the  maximum  lawful rate of interest
that may be paid  thereon  and (II) the  then  applicable  interest  rate on the
Convertible Notes being redeemed plus four percent (4%) compounded at the end of
each thirty (30) days, until the applicable  holder is paid in full, and (y) all
costs of collection,  including,  but not limited to, reasonable attorneys' fees
and costs,  whether or not suit or other formal proceedings are instituted.  All
payments shall first be applied to accrued and unpaid interest.

     (c) The Company  shall select the  Convertible  Notes to be redeemed in any
redemption in which not all of the Convertible  Notes are to be redeemed so that
the ratio of the Convertible Notes of each holder selected for redemption to the
total  Convertible  Notes owned by that holder shall be the same as the ratio of
all such  Convertible  Notes selected for  redemption  bears to the total of all
then outstanding  Convertible Notes. Should any Convertible Notes be required to
be  redeemed  under  the  terms  hereof  not be  redeemed  solely  by  reason of
limitations  




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imposed by law,  the  applicable  Convertible  Notes  shall be  redeemed  on the
earliest possible dates thereafter that the applicable  Convertible Notes may be
redeemed to the maximum extent permitted by law.

     (d) Any Notice of Conversion delivered by any Purchaser (including delivery
via  telecopy)  to the  Company  and the  Transfer  Agent  after  the  date  the
Convertible  Notes  become  convertible  by  their  terms  and  prior to the (x)
Maturity Date (if applicable) or (y) effective date of a redemption specified in
Section 3.6(a) above,  shall be honored by the Company and the conversion of the
Convertible  Notes shall be deemed effected on the Conversion Date. In addition,
between the effective date of a redemption specified in Section 3.6(a) above and
the date the  Company is  required  to deliver  the  redemption  proceeds to the
Purchasers,  if the  Convertible  Notes  are  convertible  by their  terms,  the
Purchasers  may deliver a Notice of Conversion to the Company.  Such notice will
be (x) of no force or effect if the Company timely pays the redemption  proceeds
to the  Purchasers  when  due or (y)  honored  as of the date of the  Notice  of
Conversion  if the Company  fails to timely pay the  redemption  proceeds to the
Purchasers when due.

     SECTION  3.7.   Ranking.   The  Convertible  Notes  will  rank  as  secured
obligations of the Company, parri passu to all other indebtedness of the Company
not expressly subordinated to these Convertible Notes.

     SECTION 3.8. Payment of Additional Amounts.

          (a) Any  and all  payments  by the  Company  hereunder  or  under  the
     Convertible  Notes to any Purchaser and each "qualified  assignee"  thereof
     shall be made free and clear of and without  deduction or  withholding  for
     any and all present or future taxes, levies, imposts,  deductions,  charges
     or withholdings,  and all liabilities with respect thereto (all such taxes,
     levies, imposts,  deductions,  charges,  withholdings and liabilities being
     hereinafter  referred to as "Taxes")  unless such Taxes are required by law
     or the  administration  thereof to be deducted or withheld.  If the Company
     shall  be  required  by law or the  administration  thereof  to  deduct  or
     withhold  any  Taxes  from or in  respect  of any  sum  payable  under  the
     Convertible  Notes (i) the  holders of  Convertible  Notes  subject to such
     Taxes shall have the right, but not the obligation,  for a period of thirty
     (30) days  commencing  upon the day it shall have received  written  notice
     from the Company  that it is required to withhold  Taxes to transfer all or
     any portion of the Convertible Notes to a qualified  assignee to the extent
     such  transfer can be effected in accordance  with the other  provisions of
     this  Agreement  and  applicable  law;  (ii) the  Company  shall  make such
     deductions or  withholdings;  and (iii) the Company shall forthwith pay the
     full  amount  deducted  or  withheld  to the  relevant  taxation  or  other
     authority in accordance with  applicable  law. A "qualified  assignee" of a
     Purchaser  is a Person that is  organized  under the laws of (I) the United
     States  or (II) any  jurisdiction  other  than  the  United  States  or any
     political  subdivision thereof and that (y) represents and warrants to each
     of the Company that payments of the Company to such assignee under the laws
     in  existence  on the date of 



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     this Agreement would not be subject to any Taxes and (z) from time to time,
     as and when requested by the Company,  executes and delivers to the Company
     and the Internal  Revenue Service forms,  and provides the Company with any
     information necessary to establish such assignee's continued exemption from
     Taxes under applicable law.

          (b) If  Taxes  are  imposed  upon  the  Company  and  the  holders  of
     Convertible  Notes subject to such Taxes have not exercised  their right to
     transfer the Convertible Notes to a qualified assignee as set forth in this
     Section  3.8  (either by notice to the Company to that effect or failure to
     exercise  such right  within the thirty  (30) day period  prescribed),  the
     Company shall either:

               (i) On the fifth (5th) Business Day after the failure to exercise
          such  right  (such day being  referred  to as the  "redemption  date")
          prepay  all of the  Convertible  Notes  remaining  unconverted  on the
          redemption  date and held by a party  subject to Taxes in cash for the
          Par Value Redemption Price; or

               (ii):

               (I)  The sum  payable by the Company to the  Purchasers  shall be
                    increased  as may be  necessary by the Company so that after
                    making all required  deductions or  withholdings  (including
                    deductions and withholdings applicable to additional amounts
                    paid under this Section  3.8),  such  Purchaser  receives an
                    amount  equal  to the sum it  would  have  received  if such
                    deduction or withholding had been made; and

               (II) The Company  shall  indemnify  each  Purchaser  or qualified
                    assignee,  for the full  amount  of  Taxes  or  Other  Taxes
                    (including,  without  limitation,  any taxes or Other  Taxes
                    imposed by any  jurisdiction  on amounts  payable under this
                    Section 3.8) paid by each Purchaser,  or qualified assignee,
                    and  any  liability  (including   penalties,   interest  and
                    expenses) arising therefrom or with respect thereto, whether
                    or not such Taxes or Other Taxes were  correctly  or legally
                    asserted.  Payment under this indemnification  shall be made
                    within  thirty  (30) days from the date  such  Purchaser  or
                    assignee makes written demand therefore. A certificate as to
                    the amount of such  Taxes or Other  Taxes  submitted  to the
                    Company by such  Purchaser  or assignee  shall be  inclusive
                    evidence of the amount due from the Company to such party.


          (c) If the Company pays any Taxes or Other Taxes, the Purchasers shall
     cooperate  in good  faith with the  Company  to  receive  any tax credit or
     refund  in the  amount  of such  Taxes or  Other  Taxes  applicable  to the
     Purchasers (each a "Tax Refund"). 



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     Upon the receipt by the Purchasers of any Tax Refund,  the Purchasers shall
     promptly remit the same to the Company.

          (d) The Company  shall  forthwith  pay any present or future  stamp or
     documentary taxes or any other excise or property taxes, charges or similar
     levies  (all such  taxes,  charges  and levies  hereinafter  referred to as
     "Other Taxes") which arise from any payment made under any of the Financing
     Documents or from the execution,  delivery or registration of, or otherwise
     with respect to, this Agreement other than Taxes payable solely as a result
     of the transfer from the Purchasers to a Person of any Security.

          (e) The Company shall indemnify each Purchaser, or qualified assignee,
     for the full amount of Taxes or Other Taxes (including, without limitation,
     any Taxes or Other Taxes  imposed by any  jurisdiction  on amounts  payable
     under this Section 3.8) paid by each Purchaser,  or qualified assignee, and
     any  liability  (including   penalties,   interest  and  expenses)  arising
     therefrom or with respect thereto, whether or not such Taxes or Other Taxes
     were  correctly or legally  asserted.  Payment  under this  indemnification
     shall be made within 30 days from the date such Purchaser or assignee makes
     written  demand  therefor.  A certificate as to the amount of such Taxes or
     Other Taxes submitted to the Company by such Purchaser or assignee shall be
     conclusive evidence of the amount due from the Company to such party.

          (f) Within 30 days after the date of any payment of Taxes, the Company
     will  furnish to each  Purchaser  the  original  or a  certified  copy of a
     receipt evidencing payment thereof.

          (g) Each of the  Purchasers  shall  provide to the Company a Form W-8,
     stating that it is a non-U.S.  person,  together  with any  additional  tax
     forms  which may be  required  under the Code,  as  amended  after the date
     hereof, to allow interest payments to be made to it without deduction.


     SECTION 3.9. Collateral; Collateral Maintenance.

     (a) Payment of the Convertible Notes and all indebtedness,  liabilities and
obligations  of the  Company  under  this  Agreement  and  the  other  Financing
Documents shall be secured by a first priority  security  interest on, in and to
the collateral  security  described in the Security Agreement and the Subsidiary
Security  Agreement  (collectively,  the  "Collateral").   Purchasers  shall  be
entitled  to retain,  as  collateral  security,  for the  payment of the Secured
Obligations  (as defined in the  Security  Agreement),  any amounts  drawn under
letters of credit constituting Collateral to the extent that the Company has not
complied  with this  Section 3.9 hereof and to apply such  amounts to payment of
the Convertible Notes.



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     (b) Not  later  than  fourteen  (14)  days  after  the  Closing  Date  (the
"Additional  Collateral  Date"),  the Company shall assign to the Purchasers (or
their representative), and shall grant to the Purchasers a security interest in,
Acceptable  Letters  of  Credit  such that at all  times  after  the  Additional
Collateral Date the outstanding  undrawn aggregate face amount of the Acceptable
Letters of Credit which have been assigned to the  Purchasers  (and in which the
Purchasers  shall have been granted a first priority  security  interest)  shall
equal or exceed the unpaid  principal  balance of the Convertible  Notes. In the
event that the Company  fails to assign such  additional  Acceptable  Letters of
Credit to the Purchasers (and grant to the Purchasers a first priority  security
interest  in such  Acceptable  Letters of Credit) by the  Additional  Collateral
Date,  or if on any  date  after  the  Additional  Collateral  Date  the  unpaid
principal  balance of the  Convertible  Notes  exceeds the  outstanding  undrawn
aggregate  face  amount of the  Acceptable  Letters  of Credit  which  have been
assigned to the  Purchasers  and in which the  Purchasers  have a first priority
security  interest (in either  event,  a "Lockbox  Event"),  the Company  shall,
within  two (2)  Business  Days  after the  occurrence  of such  Lockbox  Event,
establish  a  lockbox  account  with  Citibank,  N.A.,  pursuant  to the form of
agreement  attached  as Exhibit K hereto,  as to which the  Purchasers  or their
representative  shall  have the sole  right of  withdrawal  and into  which  all
payments  and  collections  with  respect  to  the  Products  and  all  accounts
receivable  and  purchase  orders of the Company and its  Subsidiaries  relating
thereto,  will be deposited,  all of the terms and  conditions of which shall be
satisfactory  to the  Purchasers  in their sole  discretion.  The Company  shall
deliver to the Purchasers, on the date of assignment,  the original counterparts
of all  additional  Acceptable  Letters  of Credit  assigned  to the  Purchasers
pursuant to this Section 3.9(b).

                                   ARTICLE IV

                             ADDITIONAL GRANT SHARES

     SECTION 4.1.  Additional Grant Shares.  Upon expiration of the Test Period,
the Company shall issue the  Additional  Grant Shares to the  Purchasers if, but
only if, the Closing Bid Prices of the Common  Stock for each Trading Day during
the Test Period does not equal or exceed the Market Price of the Common Stock on
the day prior to the Closing  Date.  All such  Additional  Grant Shares shall be
delivered  no later  than July 7,  1998 to the  Purchasers,  without  additional
compensation  paid by the Purchasers,  pro rata according to the number of Grant
Shares issued on the Closing Date.  Notwithstanding the foregoing, if the number
of  Additional  Grant Shares would exceed 50,000 shares (the number of shares in
excess of 50,000 being referred to as "Excess  Shares"),  then the Company shall
deliver  50,000 shares of Common Stock to the  Purchasers  and, at the Company's
option, the Company will either (x) deliver the Excess Shares to the Purchasers,
or (y) deliver a note in a principal  amount  equal to the product of the number
of Excess  Shares and the  Closing  Bid Price on the last day of the Test Period
(the "Share  Note")  bearing  interest at ten percent (10%) per annum payable in
full in ninety (90) days (the "Note  Maturity  Date") (the  "Payment  Option for
Additional Grant Shares"). On the Note Maturity Date the Company will either (x)
pay the  Share  Note in full in cash to the  Purchasers  or (y)  deliver  to the
Purchasers  the  greater of (i) the number of Excess  Shares or (ii) a number of




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shares  equal to the Share Note  amount  divided by the Closing Bid Price on the
Note Maturity Date.

                                    ARTICLE V

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company represents and warrants to the Purchasers, and each of them, as
of the Closing Date as set forth herein.

     SECTION 5.1. Corporate Existence and Power. The Company and each Subsidiary
is a corporation (or other legal entity) duly organized, validly existing and in
good standing under the laws of its  jurisdiction of  incorporation  and is duly
qualified to conduct  business as a foreign  corporation,  and has all corporate
power and all  governmental  licenses,  authorizations,  permits,  consents  and
approvals  required to carry on its business as now conducted and as proposed to
be conducted, except where such failure would not have a material adverse effect
on the Company or the ability of the Company to continue its current  operations
or to fulfill its obligations hereunder and under the Financing Documents.

     SECTION 5.2.  Authorization  and  Execution.  The  execution,  delivery and
performance by the Company of each Financing Document to which it is a party and
the  issuance  by the  Company  of the  Securities  have been  duly and  validly
authorized  and are  within  its  corporate  powers.  This  Agreement  and  each
Financing  Document to which it is a party has been duly  executed and delivered
by the Company and constitutes  the valid and binding  agreement of the Company.
Each of the Financing Documents  constitutes the valid and binding obligation of
the Company,  enforceable against the Company or such Subsidiary  Guarantor,  as
the  case may be,  in  accordance  with its  respective  terms,  subject  to (i)
applicable  bankruptcy,  insolvency or similar laws affecting the enforceability
of  creditors  rights  generally  and  (ii)  equitable   principles  of  general
applicability.

     SECTION 5.3. Governmental Authorization;  the Securities. The execution and
delivery by the Company of the  Financing  Documents  does not and will not, the
issuance  and sale by the Company of the  Securities  does not and will not, and
the consummation of the transactions  contemplated  hereby and thereby will not,
require any action by or in respect of, or filing with, any  governmental  body,
agency or  governmental  official  except (a) such  actions or filings that have
been  undertaken or made prior to the date hereof and that will be in full force
and effect (or as to which all applicable  waiting  periods have expired) on and
as of the date  hereof or which are not  required to be filed on or prior to the
Closing Date,  (b) such actions or filings  that, if not obtained,  would not in
the aggregate  impose  materially  adverse  conditions  upon the Company and (c)
listing  applications  to be filed with the Nasdaq Market  relating to the Grant
Shares,  Additional Grant Shares (if applicable),  Conversion Shares and Warrant
Shares.  Upon conversion in accordance with the terms of the Convertible  Notes,
or upon  exercise in  accordance  with the terms of the Warrants  (assuming  the
payment of the exercise price set forth 



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in the  Warrants),  the shares of Common  Stock when issued upon  conversion  or
exercise  and in  accordance  with the terms  thereof  shall be duly and validly
issued  and  outstanding,  fully paid and  nonassessable,  free and clear of any
claims or preemptive rights.  Assuming the representations and warranties of the
Purchasers  herein are true and correct in all  material  respects,  each of the
Securities will have been issued in material compliance with all applicable U.S.
federal and state securities laws.

     SECTION 5.4.  Contravention.  The  execution and delivery by the Company of
the  Financing  Documents  to which  it is a party  did not and  will  not,  the
issuance and sale by the Company of the  Securities did not and will not and the
consummation  of the  transactions  contemplated  hereby  and  thereby  will not
(including  without  limitation,  execution,  delivery  and  performance  of the
Lockbox Agreement), contravene or constitute a default under or violation of (i)
any  provision  of  applicable  law or  regulation,  (ii) the Company  Corporate
Documents,  (iii) any agreement,  judgment,  injunction,  order, decree or other
instrument binding upon the Company or any Subsidiary or any of their respective
assets,  or result in the creation or imposition of any Lien on any asset of the
Company.  The Company and each  Subsidiary is in compliance with and conforms to
all statutes, laws, ordinances, rules, regulations, orders, restrictions and all
other  legal   requirements  of  any  domestic  or  foreign  government  or  any
instrumentality  thereof having  jurisdiction over the conduct of its businesses
or the ownership of its  properties,  except where such failure would not have a
material  adverse  effect on the business,  condition  (financial or otherwise),
operations, performance, properties or prospects of such corporation.

     SECTION 5.5. Financial  Information and SEC Reports. The Company has timely
filed all forms,  reports and documents with the Commission since April 30, 1997
required  to be filed by it under  the  Exchange  Act  through  the date  hereof
(collectively, the "SEC Reports"). Such SEC Reports, at the time filed, complied
in all material  respects with the requirements of the Exchange Act. None of the
SEC Reports,  including without limitation any financial statements or schedules
included  therein,  contained any untrue statement of a material fact or omitted
to state a material  fact  necessary in order to make the  statements  made,  in
light of the  circumstances  under which they were made,  not  misleading at the
time  they were  filed.  There  have been no  material  adverse  changes  in the
Company's business, properties,  results of operations,  condition (financial or
otherwise)  since the date of the Company's  most recent Report on Form 10-Q for
the period ended July 31, 1997, which have not been disclosed in the SEC Reports
or to the Purchasers in writing. The audited and unaudited  consolidated balance
sheets of the Company  contained  in the SEC Reports,  the related  consolidated
statements of income,  changes in stockholders' equity and changes in cash flows
for the period ended July 31, 1997,  including the footnotes thereto,  except as
indicated  therein,  have been  prepared in  accordance  with GAAP  consistently
followed  throughout the periods indicated,  except that the unaudited financial
statements  may be  subject  to  normal  audit  adjustments  and  normal  annual
adjustments.  The SEC Reports and the most  recent  report on Form 10-Q  present
fairly, in all material respects,  the financial condition of the Company at the
date thereof and, except as indicated  therein,  present fairly, in all material
respects,  the results of the  operations  of the Company and the cash flows for
the period indicated.



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     SECTION 5.6. Litigation.  Except as disclosed in the SEC Reports,  there is
no action,  suit or  proceeding  pending or, to the  knowledge  of the  Company,
threatened against the Company or any Subsidiary, before any court or arbitrator
or any  governmental  body,  agency or official  in which there is a  reasonable
possibility of an adverse decision which could  materially  adversely affect the
business,   condition   (financial  or  otherwise),   operations,   performance,
properties or prospects of the Company or any Subsidiary or which challenges the
validity of any Financing Document.

     SECTION 5.7. Compliance with ERISA and other Benefit Plans.

     (a) Each member of the ERISA Group has fulfilled its obligations  under the
minimum funding standards of ERISA and the Code with respect to each Plan and is
in compliance in all material respects with the presently applicable  provisions
of ERISA and the Code with  respect to each Plan.  No member of the ERISA  Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Code in respect of any Plan,  (ii) failed to make any required  contribution  or
payment  to any  Plan  or  Multiemployer  Plan  or in  respect  of  any  Benefit
Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has
resulted or could result in the imposition of a Lien or the posting of a bond or
other  security  under ERISA or the Code or (iii)  incurred any liability  under
Title IV of ERISA other than a liability to the PBGC for premiums  under Section
4007 of ERISA.

     (b) The benefit plans not covered under clause (a) above (including  profit
sharing,  deferred compensation,  stock option, employee stock purchase,  bonus,
retirement,  health  or  insurance  plans,  collectively  the  "Benefit  Plans")
relating to the employees of the Company are duly registered  where required by,
and are in good standing, in all material respects,  under, all applicable laws.
All required employer and employee  contributions and premiums under the Benefit
Plans  to the  date  hereof  have  been  made,  the  respective  fund  or  funds
established  under the Benefit  Plans are funded in accordance  with  applicable
laws, and no past service funding liabilities exist thereunder.

     (c) No Benefit  Plans  have any  unfunded  liabilities,  either on a "going
concern" or "winding up" basis and determined in accordance  with all applicable
laws and actuarial  practices and using  actuarial  assumptions and methods that
are  reasonable  in the  circumstances.  No event has  occurred and no condition
exists with respect to any Benefit  Plans that has resulted or could  reasonably
be  expected to result in any pension  plan having its  registration  revoked or
wound up (in whole or in part) or refused  for the  purposes  of any  applicable
laws or being placed under the  administration  of any relevant pension benefits
regulatory  authority or being  required to pay any taxes or  penalties  (in any
material amounts) under any applicable laws.

     SECTION 5.8.  Environmental  Matters. The costs and liabilities  associated
with  Environmental  Laws  (including  the  cost of  compliance  therewith)  are
unlikely to have a material adverse effect on the business, condition (financial
or otherwise), operations,  performance,  



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properties  or prospects of the Company or any  Subsidiary.  Each of the Company
and the  Subsidiaries  conducts its  businesses  in  compliance  in all material
respects with all applicable Environmental Laws.

     SECTION 5.9. Taxes. All United States federal, state, county,  municipality
local  or  foreign  income  tax  returns  and all  other  material  tax  returns
(including  foreign tax returns)  which are required to be filed by or on behalf
of the Company and each  Subsidiary  have been filed or will be filed within the
time  prescribed  by law  (including  any  extension  of  time  approved  by the
appropriate  taxing  authority)  and all  material  taxes due  pursuant  to such
returns or pursuant  to any  assessment  received by the Company  have been paid
except those being disputed in good faith and for which  adequate  reserves have
been established. The charges, accruals and reserves on the books of the Company
in respect  of taxes or other  governmental  charges  have been  established  in
accordance with GAAP.

     SECTION 5.10. Investments,  Joint Ventures. The Company has no Subsidiaries
or other direct or indirect  Investment in any Person,  and the Company is not a
party to any partnership,  management, shareholders' or joint venture or similar
agreement other than as set forth on Schedule 5.10 hereto.

     SECTION  5.11.  Not an  Investment  Company.  Neither  the  Company nor any
Subsidiary  is an  "investment  company"  within the  meaning of the  Investment
Company Act of 1940, as amended.

     SECTION 5.12. Full Disclosure. The written information heretofore furnished
by the Company to the  Purchasers  for  purposes of or in  connection  with this
Agreement or any transaction contemplated hereby does not (taken together and on
the  date as of  which  such  information  is  furnished),  contain  any  untrue
statement of a material fact or omit to state a material fact necessary in order
to make the  statements  contained  therein,  in the light of the  circumstances
under which they are made, not misleading.

     SECTION 5.13. Capitalization. As of the date hereof, the authorized, issued
and  outstanding  capital  stock of the Company is as set forth on Schedule 5.13
hereto; and no other shares of capital stock of the Company will be outstanding.
Other than as set forth on Schedule  5.13  hereto,  there are no  subscriptions,
options, warrants,  rights,  convertible securities,  exchangeable securities or
other  agreements or commitments of any character  pursuant to which the Company
is  required  to issue any shares of its  capital  stock.  The  Common  Stock is
registered under Section 12(g) of the Exchange Act.

     SECTION  5.14.  Solicitation.  No form of general  solicitation  or general
advertising was used by the Company or, to the best of its actual knowledge, any
other Person  acting on behalf of the Company in  connection  with the offer and
sale of the Securities.  Neither the Company, nor, to its knowledge,  any Person
acting on behalf of the Company,  has,  either  directly or indirectly,  sold or
offered for sale to any Person (other than the Purchasers) any of the



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Securities or, within the six months prior to the date hereof, any other similar
security  of the  Company  except as  contemplated  by this  Agreement,  and the
Company  represents that neither itself nor any Person  authorized to act on its
behalf (except that the Company makes no representation as to the Purchasers and
their  Affiliates)  will sell or offer for sale any such security to, or solicit
any offers to buy any such security from, or otherwise  approach or negotiate in
respect  thereof with, any Person or Persons so as thereby to cause the issuance
or sale of any of the  Securities to be in violation of any of the provisions of
Section  5 of  the  Securities  Act.  The  issuance  of  the  Securities  to the
Purchasers  will not be  integrated  with any other  issuance  of the  Company"s
securities (past,  current or future) which requires  stockholder approval under
the rules of the Nasdaq Market.

     SECTION 5.15. Permits. (a) Each of the Company and its Subsidiaries has all
material  Permits as are  necessary  for the  conduct of its  business  as it is
currently carried on; (b) all such Permits are in full force and effect, and the
Company has fulfilled and  performed  all material  obligations  with respect to
such Permits; (c) to the best of the Company's knowledge,  no event has occurred
which  allows,  or after  notice or lapse of time  would  allow,  revocation  or
termination  by the  issuer  thereof  or which  results  in any  other  material
impairment  of the rights of the holder of any such Permit;  and (d) the Company
has no reason to believe  that any  governmental  body or agency is  considering
limiting, suspending or revoking any such Permit.

     SECTION 5.16. Leases. Except as disclosed on Schedule 5.16 hereto,  neither
the Company nor any Subsidiary is a party to any capital lease obligation with a
value greater than $100,000 or to any operating  lease with an aggregate  annual
rental greater than $100,000 during the life of such lease.

     SECTION 5.17.  Absence of Any  Undisclosed  Liabilities  or Capital  Calls.
There  are  no  liabilities  of  the  Company  or any  Subsidiary  of  any  kind
whatsoever, whether accrued, contingent,  absolute, determined,  determinable or
otherwise, and there is no existing condition, situation or set of circumstances
which could reasonably be expected to result in such a liability, other than (i)
those liabilities provided for in the financial statements delivered pursuant to
Section 5.5 hereof, (ii) other undisclosed liabilities which, individually or in
the aggregate, are not material to the Company, and (iii) obligations to perform
under  commitments  incurred in the  ordinary  course of business of the Company
after the Balance Sheet Date.

     SECTION  5.18.  Governmental  Regulation.   Neither  the  Company  nor  any
Subsidiary  is, or will be upon the issuance and sale of the  Securities and the
use of the proceeds  described  herein,  subject to regulation  under the Public
Utility  Holding  Company Act of 1935,  as amended,  the Federal  Power Act, the
Interstate  Commerce  Act or to any  federal  or  state  statute  or  regulation
limiting its ability to issue and perform its  obligations  under any  Financing
Document.

     SECTION 5.19.  Intellectual  Property  Rights.  Each of the Company and its
Subsidiaries owns, or is licensed under, and has the rights to use, all material
patents, trademarks, trade names, copyrights, technology, know-how and processes
(collectively, "Intellectual 



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Property")  used in, or  necessary  for the conduct of its business as currently
conducted;  to the best of the Company's knowledge, no claims have been asserted
by any Person to the use of any such  Intellectual  Property or  challenging  or
questioning the validity or  effectiveness  of any license or agreement  related
thereto. To the best of the Company's knowledge, there is no valid basis for any
such claim and the use of such  Intellectual  Property by the  Company  will not
infringe upon the rights of any Person.

     SECTION 5.20. Insurance.  The Company and its Subsidiaries  maintain,  with
financially sound and reputable insurance companies,  insurance in at least such
amounts and  against  such risks such that any  uninsured  loss would not have a
material  adverse  effect on the business,  condition  (financial or otherwise),
operations,  performance,  properties or prospects of the Company. All insurance
coverages  of the Company are in full force and effect and there are no past due
premiums in respect of any such insurance.

     SECTION 5.21. Title to Properties.  The Company and its  Subsidiaries  have
good and marketable  title to all their respective  properties  reflected on the
financial  statements  referred to in Section 5.5, and, except for the Liens (x)
permitted by Section 8.11 or (y) listed on Schedule 5.21 hereto there is no Lien
on any  asset  of  the  Company.  Except  for  financing  statements  (or  their
equivalent)  filed,  recorded or registered  with respect to Liens  permitted by
Section 8.11, there are no currently  effective  financing  statements (or their
equivalent)  of record in any  jurisdiction  covering any tangible or intangible
assets of the Company.

     SECTION  5.22.  Eligibility  to use Form  S-3.  The  Company  will take all
necessary action to meet, the "registrant eligibility" requirements set forth in
the general  instructions  to Form S-3  promulgated by the  Commission  from and
after April 15, 1998.

     SECTION 5.23. Internal Accounting Controls.  The Company maintains a system
of internal  accounting  controls  sufficient,  in the judgment of the Company's
board of directors,  to provide  reasonable  assurance that (i) transactions are
executed in accordance  with  management's  general or specific  authorizations,
(ii)  transactions are recorded as necessary to permit  preparation of financial
statements in conformity with GAAP and to maintain asset  accountability,  (iii)
access to assets is permitted only in accordance  with  management's  general or
specific  authorization  and (iv) the  recorded  accountability  for  assets  is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

     SECTION 5.24. Waiver of Registration  Rights. The Company hereby represents
that only those Persons listed on Schedule 5.24 attached  hereto have the right,
contractual  or otherwise,  to require the Company to include any securities (as
defined in Section 2(1) of the Securities Act,  including,  without  limitation,
the Common  Stock or any  derivative  securities  thereof) of the Company in the
Registration Statement.



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                                   ARTICLE VI

                REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

     SECTION 6.1. Purchase for Investment;  Authority;  Binding Agreement.  Each
Purchaser as to itself only hereby represents and warrants to the Company that:

     (a) the Purchaser is an  "accredited  investor"  within the meaning of Rule
501(a) under the Securities Act and the Securities to be acquired by it pursuant
to this  Agreement  are being  acquired  for its own account and not with a view
toward,  or for sale in connection with, any resale thereof except in compliance
with applicable  United States federal and state  securities law;  provided that
the  disposition  of the  Purchaser's  property shall at all times be and remain
within its control;

     (b) the  execution,  delivery and  performance  of this  Agreement  and the
purchase of the Securities pursuant hereto are within the Purchaser's  corporate
or partnership powers, as applicable,  and have been duly and validly authorized
by all requisite corporate or partnership action;

     (c) this Agreement has been duly executed and delivered by the Purchaser;

     (d) the execution and delivery by the Purchaser of the Financing  Documents
to  which it is a party  does  not,  and the  consummation  of the  transactions
contemplated  hereby and thereby will not,  contravene  or  constitute a default
under or violation of (i) any provision of applicable law or regulation, or (ii)
any agreement,  judgment,  injunction, order, decree or other instrument binding
upon the Purchasers;

     (e) Purchaser  understands  that the  Securities  have not been  registered
under the  Securities Act and may not be transferred or sold except as specified
in this Agreement;

     (f)  this  Agreement  constitutes  a valid  and  binding  agreement  of the
Purchaser  enforceable in accordance  with its terms,  subject to (i) applicable
bankruptcy, insolvency or similar laws affecting the enforceability of creditors
rights generally and (ii) equitable principles of general applicability;

     (g) the  Purchaser  has such  knowledge  and  experience  in financial  and
business  matters so as to be capable of evaluating  the merits and risks of its
investment  in the  Securities  and the  Purchaser  is capable  of  bearing  the
economic risks of such investment;

     (h) the  Purchaser  is  knowledgeable,  sophisticated  and  experienced  in
business  and  financial  matters;  the  Purchaser  has  previously  invested in
securities  similar to the Securities and fully  understands  the limitations on
transfer described herein; the Purchaser has been afforded access to information
about the Company and the financial condition, results of operations, 



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property,  management  and  prospects of the Company  sufficient to enable it to
evaluate its investment in the  Securities;  the Purchaser has been afforded the
opportunity to ask such questions as it has deemed  necessary of, and to receive
answers from, representatives of the Company concerning the terms and conditions
of the offering of the  Securities  and the merits and the risks of investing in
the  Securities;  and the Purchaser has been afforded the  opportunity to obtain
such additional  information  which the Company possesses or can acquire that is
necessary to verify the accuracy and  completeness of the  information  given to
the Purchaser  concerning the Company. The foregoing does not in any way relieve
the Company of its representations and other undertakings  hereunder,  and shall
not limit the Purchasers' ability to rely thereon;

     (i) Each of the Purchasers is a Nevis, West Indies corporation.

     (j) no part of the source of funds  used by the  Purchaser  to acquire  the
Securities  constitutes  assets allocated to any separate account  maintained by
the Purchaser in which any employee  benefit plan (or its related trust) has any
interest.

                                   ARTICLE VII

                 CONDITIONS PRECEDENT TO PURCHASE OF SECURITIES

     SECTION  7.1.  Conditions  Precedent to Purchase on the Closing  Date.  The
obligation  of the  Purchasers  to purchase  Convertible  Notes  pursuant to the
Agreement on the Closing Date is subject to the condition precedent that each of
the  following   conditions   shall  have  been   satisfied  to  the  reasonable
satisfaction of the Purchasers as of such Closing Date:

     (a) Receipt by each of the Purchasers of a Solvency Certificate executed by
the chief financial officer of the Company;

     (b) Receipt by each of the Purchasers of evidence  satisfactory to it as to
(i)  the  receipt  by the  Company  of all  governmental,  board  of  directors,
shareholders  and third party  consents and approvals  necessary or desirable in
connection with the issuance and sale of the Securities, and (ii) the expiration
of all applicable  waiting  periods  without any action having been taken by any
competent  authority  that could  restrain,  prevent  or impose  any  materially
adverse conditions thereon or that could seek or threaten any of the foregoing;

     (c) Receipt by each of the Purchasers of duly executed counterparts of this
Agreement,  the  Registration  Rights  Agreement,  the Security  Agreement,  the
Subsidiary  Security  Agreement and the Transfer Agent  Agreement  signed by the
Company  and,  with  respect  to the  Transfer  Agent  Agreement,  signed by the
Transfer Agent;

     (d) Each of the  Purchasers  shall  have  received  an  opinion,  dated the
Closing Date, of Tenzer  Greenblatt  LLP  substantially  in the form attached as
Exhibit I hereto; 



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     (e) All fees and expenses due and payable by the Company on or prior to the
Closing Date shall have been paid or duly  provided for in full as  contemplated
by the Transfer Agent Agreement;

     (f) The Grant Shares,  Convertible Notes and Warrants being acquired by the
Purchasers  on the Closing Date shall have been duly  executed and  delivered as
provided in the Transfer Agent Agreement;

     (g) The Purchasers shall have received an Officer's Certificate executed by
the  President,  chief  executive  officer  or chief  financial  officer  of the
Company;

     (h) The Company Corporate Documents and the Subsidiary  Corporate Documents
shall be in full force and effect and no term or  condition  thereof  shall have
been amended, waived or otherwise modified in violation of this Agreement;

     (i) The  Purchasers  or the  Transfer  Agent,  as  applicable,  shall  have
confirmed receipt of the Grant Shares,  Convertible Notes and the Warrants to be
issued on the Closing Date, duly executed by the Company,  in the  denominations
and  registered  in the names of the  Purchasers  specified  in or  pursuant  to
Schedule 2.1;

     (j)  Receipt  by  the   Purchasers  of  the  original   letters  of  credit
constituting the Collateral,  with assignments thereof to the Purchasers in form
satisfactory to the  Purchasers,  acknowledged by the issuers of such letters of
credit;

     (k) Receipt by the Purchasers of evidence  reasonably  satisfactory to them
that their security interests in the Collateral are of first priority;

     (l) Receipt by each of the  Purchasers of duly executed  counterparts  of a
lien  subordination  agreement,  in a form  satisfactory to the Purchaser,  with
respect to the Citibank  Debt,  the National Bank of Canada Debt and the Crestar
Debt;

     (m)  Receipt  by  the  Purchasers  of  Uniform  Commercial  Code  financing
statements  duly  executed by the Company  with  respect to any  Collateral  for
filing in the State of New York pursuant to the Security Agreement; and

     (n) The  Purchasers  shall have received all other  opinions,  resolutions,
certificates,   instruments,   agreements  or  other  documents  as  they  shall
reasonably request.


     SECTION 7.2.  Conditions to the Company's  Obligations.  The obligations of
the Company to issue and sell to the  Purchasers the Securities to be issued and
sold pursuant to this Agreement are subject to the satisfaction,  at or prior to
Closing Date, of the following conditions:



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     (a) The representations  and warranties of the Purchasers  contained herein
shall be true and correct in all  material  respects on the Closing Date and the
Purchasers  shall have performed and complied in all material  respects with all
agreements  required by this  Agreement to be performed or complied  with by the
Purchasers at or prior to Closing Date;

     (b) The  issue  and sale of the  Securities  by the  Company  shall  not be
prohibited by any applicable law, court order or governmental regulation;

     (c)  On  the  Closing  Date,  receipt  by  the  Company  of  duly  executed
counterparts of this  Agreement,  the  Registration  Rights  Agreement,  and the
Transfer  Agent  Agreement  signed by the  Purchasers,  and, with respect to the
Transfer Agent Agreement, signed by the Transfer Agent; and

     (d) The Company  shall have received  payment of the Purchase  Price of the
Convertible   Notes  to  be  purchased  on  such  Closing  Date  in  the  manner
contemplated by the Transfer Agent Agreement.

                                  ARTICLE VIII

                                    COVENANTS

     The Company hereby agrees that,  from and after the date hereof for so long
as any Convertible Notes remain outstanding (except for Sections 8.1(a) and (d),
8.14 and 8.22 - 8.24, which shall apply for so long as any Convertible  Notes or
Warrants remain outstanding) and for the benefit of the Purchasers:

     SECTION  8.1.  Information.  The Company will deliver to each holder of the
Convertible Notes:

     (a) promptly upon the filing thereof, copies of all registration statements
(other than the exhibits thereto and any registration  statements on Form S-8 or
its equivalent)  and reports on Forms 10-K, 10-Q and 8-K (or their  equivalents)
which the Company or any Subsidiary has filed with the Commission;

     (b) simultaneously with the delivery of each item referred to in clause (a)
above,  a  certificate  from the  Company  stating  that no  Default or Event of
Default has occurred and is continuing, or, if as of the date of such delivery a
Default or Event of Default shall have occurred and be continuing, a certificate
from the Company  setting  forth the details of such Default or Event of Default
and the action  which the  Company is taking or  proposes  to take with  respect
thereto;

     (c)  within  three (3)  Business  Days after any  executive  officer of the
Company obtains knowledge of a Default or Event of Default, a certificate of the
chief financial  officer or the chief



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accounting  officer of the Company  setting  forth the  details  thereof and the
action which the Company is taking or proposes to take with respect thereto;

     (d) promptly upon the mailing  thereof to the  shareholders  of the Company
generally,  copies of all financial statements,  reports and proxy statements so
mailed and any other document generally distributed to shareholders;

     (e) if and when any member of the ERISA  Group (i) gives or is  required to
give notice to the PBGC of any "reportable event" (as defined in Section 4043 of
ERISA) with respect to any Plan which might constitute grounds for a termination
of such Plan under Title IV of ERISA,  or knows that the plan  administrator  of
any Plan has given or is required to give notice of any such reportable event, a
copy of the notice of such reportable event given or required to be given to the
PBGC;  (ii) receives  notice of complete or partial  withdrawal  liability under
Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is
insolvent or has been terminated,  a copy of such notice;  (iii) receives notice
from  the  PBGC  under  Title IV of ERISA  of an  intent  to  terminate,  impose
liability  (other than for premiums  under Section 4007 of ERISA) in respect of,
or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies
for a waiver of the minimum  funding  standard  under Section 412 of the Code, a
copy of such application; (v) gives notice of intent to terminate any Plan under
Section 4041(c) of ERISA, a copy of such notice and other information filed with
the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063
of ERISA, a copy of such notice;  or (vii) fails to make any required payment or
contribution  to any Plan or  Multiemployer  Plan or in respect  of any  Benefit
Arrangement or makes any amendment to any Plan or Benefit  Arrangement which has
resulted or could result in the imposition of a Lien or the posting of a bond or
other  security,  a  certificate  of the chief  financial  officer  or the chief
accounting  officer of the Company  setting forth details as to such  occurrence
and action, if any, which the Company or applicable member of the ERISA Group is
required or proposes to take; and

     (f) promptly following the commencement  thereof,  notice and a description
in reasonable detail of any litigation or proceeding to which the Company or any
Subsidiary  is a party in which the amount  involved is $500,000 or more and not
covered by insurance or in which injunctive or similar relief is sought.

     SECTION 8.2.  Payment of Obligations.  The Company and each Subsidiary will
pay  and  discharge,  at or  before  maturity,  all  their  respective  material
obligations,  including,  without limitation, tax liabilities,  except where the
same  may be  contested  in good  faith  by  appropriate  proceedings  and  will
maintain,  in accordance with GAAP,  appropriate reserves for the accrual of any
of the same.

     SECTION  8.3.  Maintenance  of  Property;  Insurance.  The Company and each
Subsidiary  will keep, all property useful and necessary in its business in good
working order and condition,  ordinary wear and tear excepted. In addition,  the
Company and each Subsidiary will




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maintain  insurance  in at least such  amounts and against  such risks as it has
insured against as of the Closing Date.

     SECTION 8.4. Maintenance of Existence. The Company and each Subsidiary will
continue to engage in business of the same general type as now  conducted by the
Company and such Subsidiaries,  and will preserve,  renew and keep in full force
and effect its  respective  corporate  existence and their  respective  material
rights,  privileges and franchises  necessary or desirable in the normal conduct
of business.

     SECTION 8.5.  Compliance  with Laws. The Company and each  Subsidiary  will
comply, in all material respects, with all federal,  state, municipal,  local or
foreign  applicable laws,  ordinances,  rules,  regulations,  municipal by-laws,
codes  and  requirements  of  governmental   authorities   (including,   without
limitation,   Environmental  Laws  and  ERISA  and  the  rules  and  regulations
thereunder) except (i) where compliance  therewith is contested in good faith by
appropriate  proceedings  or  (ii)  where  non-compliance  therewith  could  not
reasonably be expected,  in the aggregate,  to have a material adverse effect on
the business,  condition  (financial  or  otherwise),  operations,  performance,
properties or prospects of the Company or such Subsidiary.

     SECTION 8.6.  Inspection  of Property,  Books and Records.  The Company and
each  Subsidiary  will  keep  proper  books  of  record  and  account  in  which
transactions  are  recorded as  necessary  to permit  preparation  of  financial
statements  in  accordance  with GAAP and to maintain  asset  accountability  in
relation to their respective businesses and activities;  and will permit, during
normal  business  hours,  H.W.  Partners,  L.P.,  or an  affiliate  thereof,  as
representatives of the Purchasers,  to visit and inspect any of their respective
properties, upon reasonable prior notice, to examine and make abstracts from any
of their respective  books and records and to discuss their respective  affairs,
finances and accounts with their respective  executive  officers and independent
public accountants, during usual business hours.

     SECTION 8.7.  Investment  Company Act. The Company will not be or become an
open-end  investment  trust,  unit investment  trust or face-amount  certificate
company  that  is or is  required  to  be  registered  under  Section  8 of  the
Investment Company Act of 1940, as amended.

     SECTION 8.8.  Limitation on Debt or Other Liabilities.  Neither the Company
nor any Subsidiary  will create,  incur,  assume or suffer to exist (at any time
after the Closing Date,  after giving effect to the  application of the proceeds
of the issuance of the Securities) any Debt exceeding,  in the aggregate for the
Company and such  Subsidiaries,  $750,000,  except for the following  (such Debt
being referred to as "Permitted Debt"):

     (i) Debt incurred or assumed  solely to pay all or any part of the purchase
price  or  cost  of  construction,  of any  real or  personal  property  (or any
improvement  thereon)  acquired or  constructed  by the Company or a  Subsidiary
after the Closing  Date  provided:  (a) any Lien with respect to such Debt shall
extend solely to the item or items of such property (or 



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improvements  thereon) so acquired or constructed  and, if required by the terms
of the instrument  originally creating such Lien, other property (or improvement
thereon)  which  is an  improvement  to or  is  acquired  for  specific  use  in
connection with such acquired or constructed  property (or improvement  thereon)
or which  is real  property  being  improved  by such  acquired  or  constructed
property (or improvement thereon); (b) the principal amount of the Debt for such
property shall at no time exceed an amount equal to the cost of the  acquisition
or the  operation  of the  property  (or  improvement  thereon)  so  acquired or
constructed;  and (c) any Lien with respect to such Debt shall be created within
sixty (60) days of the acquisition or construction of such property;

     (ii)  Non-recourse  Debt which, by its terms,  bars the lender thereof from
action against the Company or any Subsidiary, as borrower, if the security value
falls below the amount required to repay such Debt;

     (iii)  Debt  incurred  in  connection  with  equipment  leases to which the
Company  or its  Subsidiary  is a  party  incurred  in the  ordinary  course  of
business;

     (iv) Debt incurred in connection with trade accounts payable arising in the
ordinary course of business;

     (v) Revolving Credit Debt;

     (vi) Debt incurred with respect to the Convertible Notes;

     (vii) Debt incurred from time to time in  connection  with working  capital
credit  facilities  of the Company and its  Subsidiaries  as in effect as of the
Closing Date of this  Agreement  (including the Citibank Debt, the National Bank
of Canada Debt, the Crestar Debt and the Barclays Bank Debt);

     (viii)  Unsecured  Debt  subordinated  to the  convertible  Notes  on terms
reasonably satisfactory to the Purchasers;

     (ix)  Guaranties  of a  Subsidiary  by the Company or by the Company of any
Subsidiary of Permitted Debt;

     (x)  Reimbursement  obligations in respect of Letters of Credit and similar
obligations  established  by the Company in favor of suppliers  the Products and
other inventory items in the ordinary course of business;

     (xi) Debt of a Subsidiary owing to the Company or another Subsidiary;

     (xii) Debt in an amount  sufficient to prepay in full or redeem in full the
Convertible Notes when required or permitted hereunder; and



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     (xiii) Debt of the Company and its Subsidiaries  reflected on the Company's
balance  sheet  as of July  31,  1997  and the  notes  thereto  included  in the
Company's Quarterly Report on Form 10-QSB for the quarter ended July 31, 1997.

     SECTION 8.9.  Restricted  Payments.  Neither the Company nor any Subsidiary
will declare or make Restricted Payments in excess of $100,000 during any twelve
(12) month period.

     SECTION 8.10. Investments. Neither the Company nor any Subsidiary will make
or acquire any  Investment in any Person,  other than in the ordinary  course of
business which shall be limited to (a)  Investments in Cash  Equivalents and (b)
Investments  in  Subsidiaries  existing on the Closing Date and in  Subsidiaries
permitted by Section 8.21.

     SECTION 8.11.  Liens.  Neither the Company nor any Subsidiary  will create,
assume or suffer to exist any Lien on any asset now owned or hereafter  acquired
by it, except:

          (i) (A) inchoate mechanics, workmen's and carriers' liens, incident to
     current  construction,  (B) mechanics,  warehousemen's,  unpaid vendors and
     carriers' liens incident to such construction, (C) statutory and common law
     Liens of  landlords  under  equipment  leases to which the  Company  or any
     Subsidiary  is a party and (D) Liens of carriers,  warehousemen,  mechanics
     and materialmen or other similar  statutory Liens,  security deposits under
     leases and with utilities and surety or appeal bonds;

          (ii)  Liens  incurred  on  deposits  made in the  ordinary  course  of
     business in  connection  with  workers'  compensation,  performance  bonds,
     unemployment  insurance and other types of social security,  other than any
     Lien imposed by or under ERISA;

          (iii) Liens for taxes not yet due, the availability or amount of which
     is being contested in good faith by the Company or any Subsidiary;

          (iv) Easements,  rights of way, permits,  licenses, zoning ordinances,
     covenants,  restrictions,  defects, minor irregularities of title and other
     similar  Liens on property  which in the case of any  particular  parcel of
     real property do not  materially  detract from the value or  utilization of
     such real property;

          (v)  Liens  created  by or  resulting  from  any  litigation  or legal
     proceeding which is currently being contested by such Company or Subsidiary
     in good faith and by appropriate proceedings;

          (vi) Liens securing Permitted Debt;



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          (vii)  Liens in favor of customs  and all other  similar  governmental
     authorities  for customs  duties and  similar  charges in  connection  with
     importation of the Products and the inventory items by the Company; and

          (viii) Security  interests on personal  property of the Company or its
     subsidiaries  securing the Citibank Debt, the National Bank of Canada Debt,
     the  Crestar  Debt  and the  Barclays  Bank  Debt,  and in the  case of the
     Citibank  Debt,  The  National  Bank of Canada Debt and the  Crestar  Debt,
     subordinated  to the security  interest of the Purchasers in the Collateral
     on terms reasonably satisfactory to the Purchasers.

Notwithstanding  any other  provision  hereof,  the Company shall not permit any
lien to exist with respect to the Collateral.

     SECTION 8.12. Transactions with Affiliates. The Company and each Subsidiary
will not,  directly or indirectly,  pay any funds to or for the account of, make
any  investment  (whether  by  acquisition  of stock or  indebtedness,  by loan,
advance, transfer of property,  guarantee or other agreement to pay, purchase or
service,  directly or  indirectly,  any Debt,  or otherwise)  in,  lease,  sell,
transfer or  otherwise  dispose of any assets,  tangible or  intangible,  to, or
participate  in,  or  effect  any  transaction  in  connection  with  any  joint
enterprise or other joint arrangement with, any Affiliate,  except, (1) pursuant
to those  agreements  specifically  identified on Schedule 8.12 attached  hereto
(with a copy of such agreements  annexed to such Schedule 8.12) and (2) on terms
to the Company or such  Subsidiary  no less  favorable  than terms that could be
obtained  by the  Company  or  such  Subsidiary  from a  Person  that  is not an
Affiliate of the Company upon negotiation at arms' length, as determined in good
faith by the Board of Directors of the Company;  provided that no  determination
of  the  Board  of  Directors  shall  be  required  with  respect  to  any  such
transactions  entered  into in the  ordinary  course of  business.  In addition,
transactions between the Company and its Consolidated Subsidiaries or among such
Subsidiaries  which do not violate any other  provisions of this Agreement shall
not be prohibited.

     SECTION 8.13.  Merger or  Consolidation.  The Company will not, in a single
transaction or a series of related  transactions,  (i) consolidate with or merge
with or into any other  Person,  or (ii) permit any other Person to  consolidate
with or merge into it,  unless (w) either (A) the Company  shall be the survivor
of such merger or  consolidation  or (B) the  surviving  Person shall  expressly
assume by supplemental agreement all of the obligations of the Company under the
Securities and this  Agreement;  (x) immediately  before and  immediately  after
giving  effect to such  transaction  (including  any  indebtedness  incurred  or
anticipated to be incurred in connection  with the  transaction),  no Default or
Event of Default  shall have  occurred  and be  continuing  and,  following  the
transaction,  the Company may incur $1.00 of Debt without  violating Section 8.8
hereof; (y) if the Company is not the surviving entity,  such surviving entity's
common  shares shall be listed on either The New York Stock  Exchange,  American
Stock Exchange, or the Nasdaq Stock Market's National Market or the Nasdaq Small
Cap Market and (z) the Company has  delivered  to the  Purchasers  an  officers'
certificate  stating that such  consolidation,  merger or transfer complies with
this  Agreement,  that the surviving  Person agrees to be bound thereby and 




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that all  conditions  precedent in this Agreement  relating to such  transaction
have been satisfied;  provided,  however, nothing contained in this Section 8.13
shall alter or diminish the Company's  obligations  under Section 3.5(a) of this
Agreement.

     SECTION 8.14. Maintenance of Reporting Status; Supplemental Information. So
long as any of the Securities are outstanding, the Company shall timely file all
reports  required to be filed with the SEC  pursuant to the  Exchange  Act.  The
Company  shall not  terminate  its status as an issuer  required to file reports
under the Exchange  Act,  even if the Exchange Act or the rules and  regulations
thereunder  would  permit  such  termination.  If at any time the Company is not
subject to the  requirements  of Section 13 or 15(d) of the  Exchange  Act,  the
Company will promptly furnish at its expense,  upon request,  for the benefit of
the holders  from time to time of  Securities,  and  prospective  purchasers  of
Securities,  information  satisfying the  information  requirements  of Rule 144
under the Securities Act.

     SECTION 8.15.  Use of Proceeds.  The proceeds from the issuance and sale of
the  Securities  by  the  Company  shall   initially  be  used  solely  to  fund
manufacturing costs for the Products, more commonly known as "Nintendo 64" video
games.  None of the proceeds  from the issuance  and sale of  Securities  by the
Company  pursuant to this  Agreement will be used directly or indirectly for the
purpose,  whether immediate,  incidental or ultimate,  of purchasing or carrying
any "margin  stock" within the meaning of Regulation G of the Board of Governors
of the Federal Reserve System.

     SECTION  8.16.  Limitation  on  Restrictions  Affecting  Subsidiaries.  The
Company will not enter into, or suffer to exist,  any agreement  (other than the
Financing  Documents)  with any Person which  prohibits or limits the ability of
any Subsidiary to (a) pay dividends or make other  distributions or pay any Debt
owed to the Company or any Subsidiary, (b) make loans or advances to the Company
or any Subsidiary or (c) transfer any of its properties or assets to the Company
or any Subsidiary.

     SECTION 8.17.  Restrictions on Certain Amendments.  Neither the Company nor
any Subsidiary will waive any provision of, amend, or suffer to be amended,  any
provision of such  entity's  existing  indebtedness,  any  material  contract or
agreement  previously or hereafter  filed by the Company with the  Commission as
part of its SEC Reports,  any Company Corporate Document or Subsidiary Corporate
Document if such amendment would  materially  adversely affect the Purchasers or
the holders of the Securities  without the prior written consent of the Majority
Holders, which such consent shall not be unreasonably withheld.

     SECTION  8.18.  Compliance  with Terms and  Conditions  of  Contracts.  The
Company will comply, in all material respects,  with all terms and conditions of
all material contracts to which it is subject.

     SECTION  8.19.  Consolidated  Net Worth.  The  Company  will not permit its
Consolidated  Net Worth at the end of any of its fiscal quarters to be less than
$5,000,000.




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     SECTION  8.20.  Limitation  on Asset  Sales.  Neither  the  Company nor any
Subsidiary will consummate an Asset Sale unless (i) it receives consideration in
cash at the time of such Asset Sale at least equal to the fair  market  value of
the assets sold or  otherwise  disposed of (as  determined  in good faith by the
Company's  Board of  Directors)  and (ii) the Net Cash Proceeds of such sale are
used to either  (a)  purchase  similar  assets in the same line of  business  of
equivalent  value  within  sixty  (60) days of the date of the Asset Sale or (b)
immediately  redeem or prepay  the  Convertible  Notes or (c) a  combination  of
purchases and prepayment  permitted by the foregoing clauses (a) and (b), except
that the Company can engage in Asset Sales otherwise  prohibited by this Section
8.21 not exceeding  $500,000 over the life of the Convertible Notes and sales of
obsolete,  worn-out  or no  longer  useful  assets  in the  ordinary  course  of
business.  As used herein, "Asset Sale" means any sale, lease, transfer or other
disposition (or series of related sales,  leases,  transfers or dispositions) of
shares of  capital  stock of a  Subsidiary  (other  than  directors'  qualifying
shares),  property or other  assets  (each  referred to for the purposes of this
definition as a  "disposition"),  except sale of Products and other inventory or
goods in the ordinary course of business including any disposition by means of a
merger,  consolidation  or similar  transaction  (other than as permitted  under
Section 8.13).

     SECTION  8.21.  Limitation  on  Subsidiaries.  Neither  the Company nor any
Subsidiary shall permit the creation of any Subsidiaries not in existence on the
Closing Date unless approved,  in writing,  by the Majority Holders,  which such
consent shall not be unreasonably withheld.

     SECTION 8.22. Reserved Shares and Listings.

          (a) The Company will reserve from its authorized  but unissued  shares
     of Common  Stock a  sufficient  number of shares of Common  Stock to permit
     issuance of the Grant Shares,  Additional Grant Shares,  Conversion  Shares
     and Warrant Shares.

          (b) The Company  will  maintain the listing of its Common Stock on the
     Nasdaq Market and will comply in all respects with the Company's reporting,
     filing  and other  obligations  under the  bylaws or rules of the  National
     Association of Securities  Dealers and such exchanges,  as applicable.  The
     Company  shall  promptly  provide to the  Purchasers'  representative,  for
     delivery to the  Purchasers,  copies of any notices it receives from Nasdaq
     regarding the continued  eligibility of the Common Stock for listing on the
     Nasdaq Market;

          (c) The Company will not repurchase or otherwise  enter into any other
     transaction (including stock split,  recapitalization or other transaction)
     which would  cause a decrease  in the number of its shares of Common  Stock
     issued and outstanding (other than transactions that similarly decrease the
     number of  shares of Common  Stock  into  which the  Convertible  Notes and
     Warrants are convertible or exercisable, as the case may be);



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          (d) The  Company  will (i)  retain  the  Transfer  Agent as the  stock
     transfer  agent for the Company's  Common  Stock,  and (ii) if the Transfer
     Agent   voluntarily  or  involuntarily   fails  to  so  serve,   select  an
     independent,  unaffiliated  replacement  stock  transfer  agent  willing to
     perform  the  duties  of  the  Transfer  Agent  under  the  Transfer  Agent
     Agreement; and

          (e) On or prior to the date that the Commission declares effective the
     Registration  Statement,  the Company shall promptly  secure the listing of
     the Grant  Shares,  Additional  Grant  Shares (if  applicable),  Conversion
     Shares and the Warrant  Shares upon each  national  securities  exchange or
     automated  quotation  system, if any, upon which shares of Common Stock are
     then listed (subject to official notice of issuance) and shall maintain, so
     long as any other shares of Common Stock shall be so listed,  such listings
     of all Grant Shares,  Additional Grant Shares (if  applicable),  Conversion
     Shares from time to time issuable upon conversion of the Convertible  Notes
     or Warrant Shares issuable upon exercise of the Warrants.

     SECTION 8.23.  Issuance of Shares of Common Stock.  Upon  conversion of any
Convertible  Notes in  accordance  with  their  terms,  and/or  exercise  of any
Warrants in accordance with their terms, the Company will, and will use its best
lawful  efforts to cause the Transfer  Agent to, issue one or more  certificates
representing  Conversion  Shares or Warrant Shares,  as the case may be, in such
name or names and in such denominations  specified by a Purchaser in a Notice of
Conversion  or  Notice  of  Exercise,  as  the  case  may  be.  As  long  as the
Registration  Statement  contemplated by the Registration Rights Agreement shall
remain effective and the following shares are registered  thereunder,  the Grant
Shares,  Additional Grants Shares, Conversion Shares and Warrant Shares shall be
issued to any  transferee  of such shares from a Purchaser  without  restrictive
legend,  provided  such shares have been  disposed of in a manner in  accordance
with the plan of  distribution  set forth in the prospectus  forming part of the
Registration  Statement and the Transfer Agent has received a confirmation  in a
form   customarily   utilized  by  the   applicable   registered   broker/dealer
substantially to the effect that the prospectus delivery  requirements have been
satisified.  The Company further warrants and agrees that no instructions  other
than  these  instructions  have  been or will be  given to the  Transfer  Agent.
Nothing in this Section  shall affect in any way a  Purchaser's  obligations  to
comply with all securities laws applicable to such Purchaser upon resale of such
shares of Common Stock, including any prospectus delivery requirements.

     SECTION 8.24.  Form D; Blue Sky Laws.  The Company  agrees to file a Form D
with respect to the Securities as required  under  Regulation D and to provide a
copy thereof to the Purchasers'  Representative  promptly after such filing. The
Company  shall take such action as the Company  shall  reasonably  determine  is
necessary to qualify the  Securities  for sale to the  Purchasers at the Closing
under applicable state securities or "blue sky" laws of the states of the United
States (or to obtain an exemption from such  qualifications),  and shall provide
evidence of any such  action so taken to the  Purchasers'  Representative  on or
prior to the Closing Date.




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     SECTION 8.25. Further  Assurances - Collateral.  The Company agrees that at
any time and from  time to time it will  promptly  execute  and  deliver  to the
Purchasers  all further  instruments  and documents and take all further  action
that may be reasonably necessary, or that the Purchasers may reasonably request,
in order to establish, perfect and protect the security interests granted to the
Purchasers under the Security Agreement and the Subsidiary Security Agreement or
to enable the  Purchasers  to exercise  and enforce  their  rights and  remedies
thereunder with respect to any Collateral.  The Company  acknowledges and agrees
that all costs and expenses  incurred in connection with perfecting and securing
the security interests of the Purchasers in the additional acceptable letters of
credit shall be borne by the Company and shall be payable to the  Purchasers  on
demand. Such costs and expenses shall include,  without  limitation,  all filing
and recording fees and taxes, handling and courier fees, and the costs of search
reports obtained in connection with such filings and records, wherever incurred.

                                   ARTICLE IX

                             LIMITATION ON TRANSFERS

     SECTION  9.1.  Restrictions  on Transfer.  From and after their  respective
dates of issuance,  none of the Securities shall be transferable except upon the
conditions specified in this Article IX, which conditions are intended to ensure
compliance  with the provisions of the Securities Act in respect of the Transfer
of any of such Securities or any interest  therein.  Each Purchaser will use its
best efforts to cause any proposed  transferee of any  Securities  held by it to
agree to take and hold such  Securities  subject to the  provisions and upon the
conditions specified in this Article IX.

     SECTION 9.2. Restrictive Legends.

     (a)  Each  certificate  for  Securities  issued  to  a  Purchaser  or  to a
subsequent  transferee shall (except as contemplated by Section 8.23 and Section
10.3 hereof) include a legend in substantially the following form:

THE  SECURITIES  REPRESENTED  HEREBY HAVE NOT BEEN  REGISTERED  UNDER THE UNITED
STATES  SECURITIES ACT OF 1933, AS AMENDED (THE  "SECURITIES  ACT").  THE HOLDER
HEREOF,  BY PURCHASING  SUCH  SECURITIES,  AGREES FOR THE BENEFIT OF THE COMPANY
THAT SUCH SECURITIES MAY BE OFFERED,  SOLD OR OTHERWISE  TRANSFERRED ONLY (A) TO
THE  COMPANY,  (B)  PURSUANT  TO  THE  EXEMPTION  FROM  REGISTRATION  UNDER  THE
SECURITIES  ACT  PROVIDED  BY  RULE  144  THEREUNDER,  IF  AVAILABLE,  OR (C) IF
REGISTERED UNDER THE SECURITIES ACT.

     SECTION 9.3. Notice of Proposed  Transfers.  Prior to any proposed Transfer
of the Securities other than a transfer (i) registered under the Securities Act,
(ii) to an affiliate of a 




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Purchaser  which is an "accredited  investor"  within the meaning of Rule 501(a)
under the Securities Act,  provided that any such  transferee  shall agree to be
bound by the terms of this  Agreement,  or (iii) to be made in  reliance on Rule
144 under the  Securities  Act, the holder  thereof shall give written notice to
the Company of such holder's  intention to effect such  Transfer,  setting forth
the  manner  and  circumstances  of  the  proposed  Transfer,   which  shall  be
accompanied by (A) an opinion of counsel reasonably satisfactory to the Company,
confirming  that  such  transfer  does  not  give  rise  to a  violation  of the
Securities  Act, (B)  representation  letters in form and  substance  reasonably
satisfactory  to the  Company  and its  counsel  to ensure  compliance  with the
provisions  of the  Securities  Act  and  (C)  letters  in  form  and  substance
reasonably satisfactory to the Company and its counsel from each such transferee
stating such  transferee's  agreement to be bound by the terms of this Agreement
and the Registration  Rights  Agreement.  Such proposed  Transfer (other than as
specified  in clauses  (i),  (ii) or (iii)  above) may be  effected  only if the
Company  shall have  received  such  notice of  transfer,  opinion  of  counsel,
representation  letters  and  other  letters  referred  to  in  the  immediately
preceding sentence, whereupon the holder of such Securities shall be entitled to
Transfer such Securities in accordance with the terms of the notice delivered by
the holder to the Company.

                                    ARTICLE X

                     ADDITIONAL AGREEMENTS AMONG THE PARTIES

     SECTION 10.1. Registration Rights.

     (a) The Company shall grant the Purchasers registration rights covering the
Grant Shares, Additional Grant Shares, Conversion Shares and Warrant Shares (the
"Registrable  Securities")  on the terms set  forth in the  Registration  Rights
Agreement.

     (b) The Company  shall  prepare and file,  no later than April 14,  1998, a
registration statement (the "Registration Statement") on Form S-3 (or such other
form as is then available for registration) covering the sale of the Registrable
Securities.  The Company  shall use its best  efforts to cause the  Registration
Statement  to be declared  effective  by the  Commission  no later than June 15,
1998.  The  Company  shall  pay  all  expenses  of   registration   (other  than
underwriting  fees and discounts,  if any, in respect of Registrable  Securities
offered  and sold  under  such  Registration  Statement  by the  Purchasers)  in
accordance with the terms of the Registration Rights Agreement.

     (c) If the  Registration  Statement  is (x) not  declared  effective by the
Commission by the Required  Effectiveness Date, or (y) such effectiveness is not
maintained for the  Registration  Maintenance  Period,  the Company shall pay to
each Purchaser monthly, as liquidated damages and not as a penalty,  the greater
of (x) its  pro  rata  portion  of an  amount  equal  to  1.5% of the  aggregate
outstanding principal amount of the Convertible Notes, which monthly amount will
be increased to 2% in the event that the Registration  Statement is not declared
effective  by the  Commission  by  July  15 or  (y)  $2,000  for  each  day  the
Registration  Statement (i) is not declared  effective by the  



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Commission by the Required  Effectiveness Date or (ii) such period effectiveness
is not maintained for the Registration Maintenance Period (the "Default Fee").

     (d) Any  such  Default  Fee  shall  be paid in cash by the  Company  to the
Purchasers by wire transfer in  immediately  available  funds on the last day of
each calendar month following the event requiring its payment.

     (e) The Company  shall be obligated to maintain  the  effectiveness  of the
Registration  Statement  for a period of five (5) years  following  the Closing;
provided,  that if the Warrants are no longer outstanding,  such period shall be
reduced to two (2) years. If, for any reason,  (including but not limited to the
issuance of all shares of Common Stock covered by the prospectus included in the
Registration  Statement),   the  Registration  Statement  (i)  is  not  declared
effective by June 15, 1998 or (ii) ceases to be  effective  for more than thirty
(30) days during any consecutive twelve month period (a "Registration Default"),
the holders of a majority of the Convertible Notes then outstanding may elect to
cause the Company to repay the Convertible Notes in full at the Formula Price.

     SECTION 10.2. Prohibition on Equity Offerings.

     (a) Until such time as all of the  Convertible  Notes  have been  repaid or
converted in full,  the Company  agrees that it will not issue (or,  unless such
issuance would, upon the closing thereof, result in the repayment in full of the
Convertible  Notes,  agree to issue) any of its equity securities (or securities
convertible  into or  exchangeable  or exercisable  for equity  securities  (the
"Derivative  Securities"),  on terms that allow a holder thereof to acquire such
equity  securities (or Derivative  Securities) at a discount to the Market Price
of the  Common  Stock  at the time of  issuance  or,  in the case of  Derivative
Securities  (other than Convertible  Notes),  at a conversion price based on any
formula (other than standard anti-dilution provisions) based on the Market Price
on a date later than the date of issuance (each such event, a "Discounted Equity
Offering"). As used herein, "discount" shall include, but not be limited to, (1)
any warrant,  right or other security granted or offered in connection with such
issuance  which,  on the applicable date of grant is offered with an exercise or
conversion price, as the case may be, at less than the then current Market Price
of the Common  Stock or, if such  security has an exercise or  conversion  price
based on any formula (other than standard anti-dilution provisions) based on the
Market Price on a date later than the date of issuance, then such price shall be
at least equal to the Market  Price on such date of exercise or  conversion,  as
the case  may be,  or (2) any  commissions,  fees or  other  allowances  paid in
connection  with such issuances  (other than customary  underwriter or placement
agent  commissions,  fees or  allowances).  For the purposes of determining  the
Market  Price at which  Common  Stock is  acquired  under this  Section,  normal
underwriting  commissions and placement fees (including  underwriters' warrants)
are permitted.

     (b) Until such time as all of the  Convertible  Notes  have been  repaid or
converted  in full,  the  Company  agrees it will not  issue  (or,  unless  such
issuance would, upon the closing thereof, result in the repayment in full of the
Convertible  Notes,  agree to issue) any of its equity securities 




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(or  securities  convertible  into or  exchangeable  or  exercisable  for equity
securities),  unless any shares of Common Stock issued or issuable in connection
therewith are "restricted  securities".  As used herein "restricted  securities"
shall  mean  securities   which  may  not  be  sold  by  virtue  of  contractual
restrictions  imposed  by the  Company  either  pursuant  to an  exemption  from
registration  under the Securities  Act or pursuant to a registration  statement
filed by the Company with the  Commission,  in each case prior to eighteen  (18)
months following the date of issuance of such securities.

     (c) The restrictions  contained in this Section 10.2 shall not apply to the
issuance  by the  Company  of (or  the  agreement  to  issue)  Common  Stock  or
Derivative  Securities  in  connection  with (w) the  acquisition  (including by
merger) of a business or of assets otherwise permitted under this Agreement, (x)
stock option or other compensatory plans, (y) Derivative Securities  outstanding
on the date hereof,  or (z) issuances of Common Stock and Derivative  Securities
which do not violate or otherwise  create a violation  hereunder or issuances of
Common Stock upon conversion and/or exercise of such Derivative Securities.

     SECTION 10.3. Liquidated Damages.

     (a) The Company shall, and shall use its best efforts to cause the Transfer
Agent to, issue and deliver shares of Common Stock (x) within three (3) New York
Stock  Exchange  Trading Days of delivery of a Notice of Conversion or Notice of
Exercise,  as applicable,  with a restrictive legend, and/or (y) within five (5)
New York Stock Exchange  Trading Days of delivery of a Notice of Conversion or a
Notice of Exercise, as applicable,  without a restrictive legend,  provided that
such shares of Common Stock have been disposed of in accordance with the plan of
distribution  set forth in the  prospectus  forming  a part of the  Registration
Statement (the "Deadline"). If for any reason, other than as a result of actions
taken by a Purchaser  in breach of this  Agreement,  the Company  fails to issue
such  certificates of Common Stock by the Deadline,  then, as compensation,  and
not as a penalty,  the Company agrees to pay liquidated damages to the Purchaser
that  delivered  such Notice of  Conversion  or Notice of Exercise for such late
issuance  of such  certificates  an amount  equal to $1,000 per day for each day
such  certificates  are not  delivered  for the first  ten (10)  days  after the
Deadline  and $2,000 per day for each day  thereafter.  The Company  understands
that a delay in the  issuance  of such  certificates  after the  Deadline  could
result in economic loss to the Purchaser.

     (b)  Upon  demand,  the  Company  shall  promptly  pay the  Purchasers  any
liquidated  damages  incurred under this Section by wire transfer in immediately
available funds to an account designated by the Purchasers. Nothing herein shall
waive the Company's obligations to timely deliver Grant Shares, Additional Grant
Shares,  Conversion  Shares or Warrant Shares or limit any Purchaser's  right to
pursue  actual  damages  (less the  amount of any  liquidated  damages  received
pursuant to the foregoing) for the Company's failure to issue and deliver shares
of Common Stock to such Purchaser consistent with the terms of this Agreement.



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     SECTION 10.4.  Conversion  Notice.  The Company agrees that, in addition to
any other remedies which may be available to the Purchasers,  including, but not
limited to, the remedies  available under Section 10.3, in the event the Company
fails for any reason  (other than as a result of actions taken by a Purchaser in
breach of this  Agreement)  to effect  delivery to a Purchaser  of  certificates
representing  Conversion  Shares or Warrant  Shares on or prior to the Deadline,
such Purchaser will be entitled,  if prior to the delivery of such certificates,
to revoke the Notice of  Conversion or Notice of Exercise by delivering a notice
to such effect to the Company and to the Transfer  Agent,  whereupon the Company
and  the  Purchaser  shall  each  be  restored  to  their  respective  positions
immediately  prior to  delivery  of such  Notice  of  Conversion  or  Notice  of
Exercise.

     SECTION 10.5. Limitation on Conversion Prior to Default.

     (a) In addition to and not in lieu of the  limitations  on  conversion  set
forth in the Convertible Notes and Warrants,  the conversion and exercise rights
of  the  Purchasers  set  forth  in  the  Convertible  Notes  and  Warrants,  as
applicable,  shall be limited, solely to the extent required, from time to time,
such that in no  instance  shall the  maximum  number of shares of Common  Stock
which  the  Purchasers  (singularly,  together  with  any  Persons  who  in  the
determination  of such Purchasers,  together with such Purchasers,  constitute a
"group" as defined in Rule 13d-5 of the Exchange  Act) may receive in respect of
any conversion of the Convertible Notes or exercise of the Warrants,  exceed, at
any one time,  an amount equal to the  remainder of (i) 4.99% of the then issued
and outstanding  shares of Common Stock of the Company following such conversion
or exercise  minus (ii) the number of shares of Common Stock of the Company then
owned by the  Purchasers  (but  exclusive  of any shares of Common  Stock deemed
beneficially  owned due to ownership of the Convertible Notes and Warrants) (the
foregoing being herein referred to as the  "Limitation on  Conversion").  At the
written request of the Company, the applicable  Purchasers shall certify in each
Notice of Conversion  and Notice of Exercise  that it is in compliance  with the
Limitation on Conversion.

     (b) The  Limitation  on  Conversion  shall  not  apply,  and shall be of no
further force and effect,  (i) upon the occurrence of any voluntary or mandatory
redemption  transaction  described  in Sections  3.4 or 3.5 hereof,  (ii) on and
following  the Maturity Date or (iii)  following the  occurrence of any Event of
Default described in Section 12.1 hereof and for which the applicable  Purchaser
has provided written notice thereof and which is not cured within the greater of
the  applicable  time period  specified in either (A) such written notice of the
applicable Purchaser or (B) Section 12.1 hereof.

     (c) If, at any time,  the  aggregate  shares of Common Stock  issuable upon
conversion of the Convertible Notes, issuance of the Grant Shares and Additional
Grant  Shares and  exercise of the  Warrants  exceeds the  Conversion  Limit (as
hereafter  defined)  then in effect,  (I) the Company  shall deliver a notice to
that effect to the Purchasers and the Transfer Agent ("Company Notice") and (ii)
the Company shall, at the option of he Purchasers, within sixty (60) days of the
Company Notice either (a) obtain approval of the Company's  shareholders  (or an
appropriate  waiver from the 



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Nasdaq  Market)  of the  issuance  of shares  of  Common  Stock in excess of the
Conversion  Limit in a quantity  reasonably  acceptable to the purchasers and in
all events  sufficient  to honor  conversion in full of the  Convertible  Notes,
issuance of the Grant Shares and Additional Grant shares and exercise in full of
the Warrants, or (b) repay the Convertible Notes at the Formula Price and redeem
the  Warrants at the Warrant  Redemption  Price.  The term  "Warrant  Redemption
Price" shall mean the greater of (x) the appraised  value of the Warrants on the
date  they  are  called  for   redemption   (determined   with  reference  to  a
"Black-Sholes"  or similar  option  pricing  model)  and (y) the  product of the
excess of (1) the Market Price of the Common Stock on the date that the Warrants
for called for redemption over (2) the exercise price of the Warrants.

     (d) As used herein, "Conversion Limit" shall mean twenty percent (19.9%) of
the then issued and outstanding  shares of Common Stock of the Company as of the
applicable  date of  determination,  or such  greater  number  of  shares as the
shareholders of the Company may have previously approved (the "Maximum Number of
Shares").

     (e) Subject to the foregoing  limitations,  each  Purchaser  shall,  at its
option,  have the sole  right to  determine  whether  to  exercise  the right of
conversion or exercise for the Convertible Notes and Warrants. The Company shall
honor each Notice of Conversion and Notice of Exercise in the order received.

                                   ARTICLE XI

                            ADJUSTMENT OF FIXED PRICE

     SECTION 11.1. Reorganization.  The exercise price of the Warrants set forth
therein  (collectively,  the "Fixed  Prices")  shall be  adjusted  as  hereafter
provided.

     SECTION 11.2. Share Reorganization. If and whenever the Company shall:

          (i)  subdivide the  outstanding  shares of Common Stock into a greater
     number of shares;

          (ii) consolidate the outstanding shares of Common Stock into a smaller
     number of shares;

          (iii)  issue  Common   Stock  or   securities   convertible   into  or
     exchangeable  for  shares of  Common  Stock as a stock  dividend  to all or
     substantially all the holders of Common Stock; or

          (iv) make a  distribution  on the  outstanding  Common Stock to all or
     substantially  all the holders of Common  Stock  payable in Common Stock or
     securities convertible into or exchangeable for Common Stock;



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any of such events being herein  called a "Share  Reorganization",  then in each
such case the applicable  Fixed Price shall be adjusted,  effective  immediately
after the record date at which the holders of Common  Stock are  determined  for
the  purposes of the Share  Reorganization  or, if no record date is fixed,  the
effective date of the Share Reorganization,  by multiplying the applicable Fixed
Price in  effect  on such  record or  effective  date,  as the case may be, by a
fraction of which:

          (I) the  numerator  shall be the  number of  shares  of  Common  Stock
     outstanding on such record or effective date (without  giving effect to the
     transaction); and

          (II) the  denominator  shall be the  number of shares of Common  Stock
     outstanding after giving effect to such Share Reorganization, including, in
     the case of a distribution of securities  convertible  into or exchangeable
     for shares of Common Stock, the number of shares of Common Stock that would
     have  been  outstanding  if such  securities  had  been  converted  into or
     exchanged for Common Stock on such record or effective date.

     SECTION 11.3.  Rights Offering.  If and whenever the Company shall issue to
all or  substantially  all the  holders  of Common  Stock,  rights,  options  or
warrants  under which such holders are  entitled,  during a period  expiring not
more than 45 days after the  record  date of such  issue,  to  subscribe  for or
purchase Common Stock (or securities convertible into or exchangeable for Common
Stock), at a price per share (or, in the case of securities  convertible into or
exchangeable  for Common Stock, at an exchange or conversion  price per share at
the date of issue of such  securities)  of less than 95% of the Market  Price of
the Common  Stock on such  record  date (any such event  being  herein  called a
"Rights  Offering"),  then in each such case the applicable Fixed Price shall be
adjusted, effective immediately after the record date at which holders of Common
Stock are determined for the purposes of the Rights Offering, by multiplying the
applicable Fixed Price in effect on such record date by a fraction of which:

     (i) the numerator shall be the sum of:

          (I) the number of shares of Common  Stock  outstanding  on such record
     date; and

          (II) a number obtained by dividing:

          (A) either,

               (x) the product of the total  number of shares of Common Stock so
          offered  for  subscription  or  purchase  and the price at which  such
          shares are so offered, or

               (y) the product of the maximum  number of shares of Common  Stock
          into or for  which  the  convertible  or  exchangeable  securities  so
          offered for subscription or 



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          purchase may be converted or exchanged and the  conversion or exchange
          price of such securities,

          as the case may be, by

               (B) the Market Price of the Common Stock on such record date; and

          (ii) the denominator shall be the sum of:

               (I) the  number of shares of  Common  Stock  outstanding  on such
          record date; and

               (II)  the  number  of  shares  of  Common  Stock so  offered  for
          subscription  or purchase (or, in the case of  securities  convertible
          into or exchangeable for Common Stock, the maximum number of shares of
          Common  Stock  for  or  into  which  the  securities  so  offered  for
          subscription or purchase may be converted or exchanged).

To the extent that such rights,  options or warrants are not exercised  prior to
the  expiry  time  thereof,  the  applicable  Fixed  Price  shall be  readjusted
effective immediately after such expiry time to the applicable Fixed Price which
would  then have been in effect  upon the  number of shares of Common  Stock (or
securities  exchangeable into Common Stock) actually delivered upon the exercise
of such rights, options or warrants.

     SECTION 11.4. Special Distribution. If and whenever the Company shall issue
or distribute to all or substantially all the holders of Common Stock:

          (i) shares of the Company of any class, other than Common Stock;

          (ii) rights, options or warrants; or

          (iii)  any other  assets  (excluding  cash  dividends  and  equivalent
     dividends in shares paid in lieu of cash dividends in the ordinary course);

and if such issuance or distribution does not constitute a Share  Reorganization
or  a  Rights   Offering   (any  such  event  being  herein  called  a  "Special
Distribution"),  then in each  such case the  applicable  Fixed  Price  shall be
adjusted,  effective  immediately  after the record date at which the holders of
Common  Stock are  determined  for  purposes  of the  Special  Distribution,  by
multiplying  the  applicable  Fixed  Price in  effect on such  record  date by a
fraction of which:

          (i) the numerator shall be the difference between:

          (A) the product of the number of shares of Common Stock outstanding on
     such record date and the Market Price of the Common Stock on such date; and



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          (B) the fair market  value,  as  determined  by the  Directors  (whose
     determination  shall be conclusive),  to the holders of Common Stock of the
     shares,  rights,  options,  warrants,  evidences of  indebtedness  or other
     assets  issued  or  distributed  in the  Special  Distribution  (net of any
     consideration paid therefor by the holders of Common Stock), and

          (ii) the  denominator  shall be the product of the number of shares of
     Common  Stock  outstanding  on such record date and the Market Price of the
     Common Stock on such date.

     SECTION 11.5. Capital Reorganization. If and whenever there shall occur:

          (i) a reclassification  or redesignation of the shares of Common Stock
     or any change of the shares of Common Stock into other  shares,  other than
     in a Share Reorganization;

          (ii) a  consolidation,  merger or amalgamation of the Company with, or
     into another body corporate; or

          (iii) the  transfer of all or  substantially  all of the assets of the
     Company to another body corporate;

(any such event being herein  called a "Capital  Reorganization"),  then in each
such case the holder who  exercises  the right to convert  Convertible  Notes or
exercise the Warrants  after the effective  date of such Capital  Reorganization
shall be entitled to receive and shall accept,  upon the exercise of such right,
in lieu of the  number  of  shares  of Common  Stock to which  such  holder  was
theretofore  entitled  upon  the  exercise  of  the  conversion  privilege,  the
aggregate  number of shares or other securities or property of the Company or of
the body corporate  resulting from such Capital  Reorganization that such holder
would have been  entitled to receive as a result of such Capital  Reorganization
if, on the  effective  date  thereof,  such  holders  had been the holder of the
number of shares of Common Stock to which such holder was  theretofore  entitled
upon conversion; provided, however, that no such Capital Reorganization shall be
consummated  in effect unless all necessary  steps shall have been taken so that
such holders  shall  thereafter  be entitled to receive such number of shares or
other  securities of the Company or of the body  corporate  resulting  from such
Capital  Reorganization,  subject to adjustment  thereafter  in accordance  with
provisions the same, as nearly as may be possible, as those contained above.

     SECTION 11.6. Adjustment Rules. The following rules and procedures shall be
applicable to adjustments made in this Article X:

          (a) no  adjustment  in the  applicable  Fixed  Price shall be required
     unless  such  adjustment  would  result  in a change  of at least 1% in the
     applicable  Fixed  Price  then  in  



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     effect,  provided,  however,  that  any  adjustments  which,  but  for  the
     provisions  of this clause would  otherwise  have been required to be made,
     shall  be  carried  forward  and  taken  into  account  in  any  subsequent
     adjustment;

          (b) no adjustment in the applicable Fixed Price shall be made pursuant
     to this  Article  XI in  respect  of the issue  from time to time of Common
     Stock to  holders  of Common  Stock  who  exercise  an  option  to  receive
     substantially  equivalent  dividends  in Common  Stock in lieu of receiving
     cash dividends in the ordinary course; and

          (c)  if a  dispute  shall  at  any  time  arise  with  respect  to any
     adjustment  of  the   applicable   Fixed  Price,   such  dispute  shall  be
     conclusively  determined  by the  auditors  of the  Company or, if they are
     unable or unwilling to act, by a firm of independent  chartered accountants
     selected by the Directors and any such determination  shall be binding upon
     the Company and Purchasers.

     SECTION 11.7. Certificate as to Adjustment.  The Company shall from time to
time promptly  after the occurrence of any event which requires an adjustment in
the applicable  Fixed Price deliver to the  Purchasers a certificate  specifying
the nature of the event requiring the  adjustment,  the amount of the adjustment
necessitated  thereby,  the  applicable  Fixed Price after giving effect to such
adjustment and setting forth,  in reasonable  detail,  the method of calculation
and the facts upon which such calculation is based.

     SECTION 11.8. Notice to Noteholders. If the Company shall fix a record date
for:

          (a)  any  Share   Reorganization   (other  than  the   subdivision  of
     outstanding   Common  Stock  into  a  greater   number  of  shares  or  the
     consolidation of outstanding Common Stock into a smaller number of shares),

          (b) any Rights Offering.,

          (c) any Special Distribution,

          (d) any  Capital  Reorganization  (other  than a  reclassification  or
     redesignation of the Common Stock into other shares), or

          (e) any cash dividend,

the  Company  shall,  not less than 10 days prior to such  record date or, if no
record date is fixed,  prior to the  effective  date of such event,  give to the
Purchasers  notice of the  particulars  of the proposed event or the extent that
such particulars have been determined at the time of giving the notice.




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                                   ARTICLE XII

                                EVENTS OF DEFAULT

     SECTION 12.1.  Events of Default.  If one or more of the  following  events
(each an "Event of Default") shall have occurred and be continuing:

          (a) failure by the Company to pay or prepay when due,  all or any part
     of the principal on any of the Convertible Notes;

          (b) failure by the Company to pay (i) within three (3)  Business  Days
     of the due date  thereof  any  interest  on any  Convertible  Notes or (ii)
     within  five (5)  Business  Days  following  the  delivery of notice to the
     Company of any fees or any other amount payable (not otherwise  referred to
     in (a) above or this clause (b)) by the Company under this Agreement;

          (c) failure by the Company to timely comply with the  requirements  of
     Section  10.3 hereof,  which  failure is not cured within seven (7) days of
     such failure;

          (d)  failure on the part of the  Company  to  observe  or perform  any
     covenant or agreement  contained  in any other  Financing  Document,  which
     failure is not cured within the time period set forth therein;

          (e)  failure on the part of the  Company  to  observe  or perform  any
     covenant  contained  in  Sections  3.9,  8.4,  8.7-8.14  and  8.20  of this
     Agreement;

          (f)  failure on the part of the  Company  to  observe  or perform  any
     covenant  contained in this Agreement  (other than those covered by clauses
     (a), (b), (c) or (e) above) for 30 days from the date of such occurrence;

          (g) the trading in the Common  Stock shall have been  suspended by the
     Commission or by the Nasdaq Market (except for any suspension of trading of
     limited  duration solely to permit  dissemination  of material  information
     regarding the Company and except if, at the time there is any suspension on
     the Nasdaq Market, the Common Stock is then listed and approved for trading
     on either the New York Stock  Exchange,  the American Stock  Exchange,  the
     Nasdaq  Stock  Market's  Small Cap Market,  or the Nasdaq  National  Market
     within ten (10) Trading Days thereof);

          (h) failure of the Company to obtain the listing of the Grant  Shares,
     Additional Grant Shares,  Conversion Shares and Warrant Shares as set forth
     in Section 8.23,  which  failure is not cured within  fifteen (15) Business
     Days of such failure;



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          (i) the Company  shall have its Common Stock  delisted from the Nasdaq
     Market  for at least  ten (10)  consecutive  Trading  Days and is unable to
     obtain a listing on either the New York Stock Exchange,  the American Stock
     Exchange,  the Nasdaq Stock  Market's  Small Cap Market or the Nasdaq Stock
     Market's National Market within such ten (10) Trading Days;

          (j) the Registration  Statement shall not have been declared effective
     by the Commission, with such effectiveness maintained, for the Registration
     Maintenance Period,  which results in the Company incurring the Default Fee
     for a period of ten (10) days;

          (k) the Company or any  Subsidiary  has commenced a voluntary  case or
     other proceeding seeking liquidation,  winding-up,  reorganization or other
     relief  with  respect  to  itself  or  its  debts  under  any   bankruptcy,
     insolvency,  moratorium  or other similar law now or hereafter in effect or
     seeking the appointment of a trustee,  receiver,  liquidator,  custodian or
     other similar  official of it or any substantial  part of its property,  or
     has  consented  to any  such  relief  or to the  appointment  of or  taking
     possession by any such official in an involuntary  case or other proceeding
     commenced  against it, or has made a general  assignment for the benefit of
     creditors,  or has failed generally to pay its debts as they become due, or
     has taken any corporate action to authorize any of the foregoing;

          (l) an involuntary case or other proceeding has been commenced against
     the   Company  or  any   Subsidiary,   seeking   liquidation,   winding-up,
     reorganization  or other  relief with  respect to it or its debts under any
     bankruptcy, insolvency, moratorium or other similar law now or hereafter in
     effect or  seeking  the  appointment  of a trustee,  receiver,  liquidator,
     custodian or other similar  official of it or any  substantial  part of its
     property,  and such  involuntary  case or  other  proceeding  shall  remain
     undismissed  and unstayed  for a period of 60 days,  or an order for relief
     has been entered  against the Company or any  Subsidiary  under the federal
     bankruptcy laws as now or hereafter in effect;

          (m)  payment  default in respect of any Debt in excess of  $500,000 of
     the Company or any Subsidiary,  or the Company or any Subsidiary has failed
     to pay at maturity or within any applicable period of grace any such Debt;

          (n)  judgments  or  orders  for the  payment  of  money  which  in the
     aggregate at any one time exceed  $500,000 and are not covered by insurance
     have been  rendered  against  the Company or any  Subsidiary  by a court of
     competent   jurisdiction  and  such  judgments  or  orders  shall  continue
     unsatisfied and unstayed for a period of 60 days;

          (o) any representation,  warranty,  certification or statement made by
     the  Company  in any  Financing  Document  or  which  is  contained  in any
     certificate, document 



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     or  financial  or  other  statement  furnished  at  any  time  under  or in
     connection  with any Financing  Document shall prove to have been untrue in
     any material respect when made;

          (p) any member of the ERISA Group has failed to pay when due an amount
     or amounts  aggregating  in excess of  $100,000  which it shall have become
     liable to pay under Title IV of ERISA;  or notice of intent to  terminate a
     Material  Plan has been filed  under Title IV of ERISA by any member of the
     ERISA Group, any plan administrator or any combination of the foregoing; or
     the PBGC has instituted  proceedings  under Title IV of ERISA to terminate,
     to impose  liability  (other than for premiums under Section 4007 of ERISA)
     in respect  of, or to cause a trustee to be  appointed  to  administer  any
     Material  Plan;  or a condition  has existed by reason of which the PBGC is
     entitled to obtain a decree  adjudicating  that any  Material  Plan must be
     terminated; or there has occurred a complete or partial withdrawal from, or
     a default, within the meaning of Section 4219(c) (5) of ERISA, with respect
     to, one or more  Multiemployer  Plans which could cause one or more members
     of the  ERISA  Group to incur a  current  payment  obligation  in excess of
     $100,000;

          (q) any  Letter  of  Credit  in which  the  Purchasers  are  granted a
     security interest pursuant to the Security  Agreement and/or the Subsidiary
     Security  Agreement  shall,  for any  reason,  cease  to be an  enforceable
     obligation  of the issuer  thereof or if any such issuer shall deny that it
     has any further liability or obligation thereunder, other than by reason of
     payment of the full amount of any Letter of Credit  (unless within five (5)
     days of such denial letter,  such issuer either retracts such denial or the
     Company  delivers  to the  Purchasers  cash equal to the face amount of the
     Letter of Credit);

     then, and in every such  occurrence,  any Purchaser may, with respect to an
     Event of Default  specified  in  paragraphs  (a) or (b),  and the  Majority
     Holders may,  with respect to any other Event of Default,  by notice to the
     Company,  declare the Convertible  Notes to be, and the  Convertible  Notes
     shall thereon become immediately due and payable; provided that in the case
     of any of the Events of Default  specified  in  paragraph  (k) or (l) above
     with respect the Company or any Subsidiary, then, without any notice to the
     Company  or any  other  act by any  Purchaser,  the  entire  amount  of the
     Convertible  Notes  shall  become  immediately  due and  payable,  provided
     further,  if any Event of  Default  has  occurred  and is  continuing,  and
     irrespective of whether any Convertible Note has been declared  immediately
     due and payable  hereunder,  any Purchaser of Convertible Notes may proceed
     to protect and enforce  the rights of such  Purchaser  by an action at law,
     suit in equity or other  appropriate  proceeding,  whether for the specific
     performance of any agreement  contained herein or in any Convertible  Note,
     or for an  injunction  against a  violation  of any of the terms  hereof or
     thereof,  or in aid of the exercise of any power granted  hereby or thereby
     or by law or otherwise,  and provided  further,  in the case of an Event of
     Default, the amount declared due and payable on the Convertible Notes shall
     be (x)  prior  to the  expiration  of the  Bridge  Period,  the  Par  Value
     Redemption  Price and (y) after the  expiration  of the  Bridge  Period the
     Formula Price thereof.



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     SECTION  12.2.  Powers and Remedies  Cumulative.  No right or remedy herein
conferred  upon or reserved to the Purchasers is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent permitted
by law, be  cumulative  and in  addition  to every other right and remedy  given
hereunder or now or  hereafter  existing at law or in equity or  otherwise.  The
assertion or employment of any right or remedy  hereunder,  or otherwise,  shall
not prevent the  concurrent  assertion or  employment  of any other  appropriate
right or remedy. Every power and remedy given by the Convertible Notes or by law
may be exercised from time to time,  and as often as shall be deemed  expedient,
by the Purchasers.

                                  ARTICLE XIII

                                  MISCELLANEOUS

     SECTION 13.1. Notices. All notices, demands and other communications to any
party hereunder shall be in writing  (including  telecopier or similar  writing)
and shall be given to such party at its address set forth on the signature pages
hereof,  or such  other  address  as such party may  hereafter  specify  for the
purpose to the other parties.  Each such notice,  demand or other  communication
shall be effective (i) if given by telecopy,  when such telecopy is  transmitted
to the telecopy number specified on the signature page hereof,  (ii) if given by
mail,  four days after such  communication  is  deposited in the mail with first
class  postage  prepaid,  addressed  as aforesaid or (iii) if given by any other
means, when delivered at the address specified in or pursuant to this Section.

     SECTION 13.2. No Waivers; Amendments.

     (a) No failure or delay on the part of any party in  exercising  any right,
power or remedy  hereunder  shall  operate  as a waiver  thereof,  nor shall any
single or partial exercise of any such right, power or remedy preclude any other
or further exercise thereof or the exercise of any other right, power or remedy.

     (b) Any provision of this Agreement may be amended,  supplemented or waived
if, but only if,  such  amendment,  supplement  or waiver is in  writing  and is
signed by the Company  and the  Majority  Holders;  provided,  that  without the
consent of each holder of any Convertible Note affected thereby, an amendment or
waiver may not (a) reduce the aggregate  principal  amount of Convertible  Notes
whose  holders must  consent to an  amendment or waiver,  (b) reduce the rate or
extend the time for payment of interest on any Convertible  Note, (c) reduce the
principal amount of or extend the stated maturity of any Convertible Note or (d)
make any  Convertible  Note payable in money or property other than as stated in
such  Convertible  Note.  In  determining  whether the holders of the  requisite
principal amount of Convertible Notes have concurred in any direction,  consent,
or waiver as provided in any  Financing  Document,  Convertible  Notes which are
owned by the Company or any other  obligor on or  guarantor  of the  Convertible
Notes, or by any Person Controlling, Controlled by, or under Common Control with





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any of the foregoing,  shall be disregarded and deemed not to be outstanding for
the  purpose  of any  such  determination;  and  provided  further  that no such
amendment,  supplement or waiver which affects the rights of the  Purchasers and
their  affiliates  otherwise  than  solely in their  capacities  as  holders  of
Convertible  Notes shall be effective  with respect to them without  their prior
written consent.

     SECTION  13.3.  Indemnification.  The Company  agrees to indemnify and hold
harmless each Purchaser,  its affiliates,  and each Person, if any, who controls
such Purchaser,  or any of its affiliates,  within the meaning of the Securities
Act or the Exchange Act (a Controlling  Person"),  and the respective  partners,
agents,  employees,  officers and directors of the Purchasers,  their affiliates
and any such Controlling  Person (each an Indemnified  Party" and  collectively,
the "Indemnified Partie ), from and against any and all losses, claims, damages,
liabilities  and  expenses  (including,  without  limitation  and  as  incurred,
reasonable  costs of  investigating,  preparing or  defending  any such claim or
action, whether or not such Indemnified Party is a party thereto,  provided that
the Company  shall not be  obligated  to advance  such costs to any  Indemnified
Party other than the  Purchasers  unless it has received  from such  Indemnified
Party an  undertaking to repay to the Company the costs so advanced if it should
be determined by final judgment of a court of competent  jurisdiction  that such
Indemnified Party was not entitled to indemnification  hereunder with respect to
such costs) which may be incurred by such  Indemnified  Party in connection with
any investigative,  administrative or judicial  proceeding brought or threatened
that  relates  to or arises  out of,  or is in  connection  with any  activities
contemplated  by any  Financing  Document  or any  other  services  rendered  in
connection  herewith;  provided that the Company will not be responsible for any
claims,  liabilities  losses,  damages or expenses that are  determined by final
judgment of a court of competent  jurisdiction  to result from such  Indemnified
Party's gross negligence, willful misconduct or bad faith.

     If any action shall be brought against an Indemnified Party with respect to
which  indemnity may be sought  against the Company under this  Agreement,  such
Indemnified  Party shall promptly notify the Company in writing and the Company,
at its option,  may,  assume the defense  thereof,  including the  employment of
counsel  reasonably  satisfactory to such  Indemnified  Party and payment of all
reasonable  fees and  expenses.  The failure to so notify the Company  shall not
affect any obligations the Company may have to such Indemnified Party under this
Agreement or otherwise  unless the Company is materially  adversely  affected by
such failure.  Such  Indemnified  Party shall have the right to employ  separate
counsel in such action and participate in the defense thereof,  but the fees and
expenses  of such  counsel  shall be at the expense of such  Indemnified  Party,
unless:  (i) the Company has failed to assume the defense and employ  counsel or
(ii) the named  parties to any such action  (including  any  impleaded  parties)
include such Indemnified Party and the Company, and such Indemnified Party shall
have been  advised  by  counsel  that  there may be one or more  legal  defenses
available to it which are different from or additional to those available to the
Company,  in which  case,  if such  Indemnified  Party  notifies  the Company in
writing that it elects to employ separate counsel at the expense of the Company,
the  Company  shall not have the right to assume the  defense of such  action or
proceeding on behalf of such  Indemnified  Party,  provided,  however,  that the
Company  



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shall not, in connection  with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general  allegations  or  circumstances,  be responsible
hereunder  for the  reasonable  fees and  expenses of more than one such firm of
separate  counsel,  which counsel shall be  designated  by the  Purchasers.  The
Company  shall not be liable  for any  settlement  of any such  action  effected
without the  written  consent of the Company  (which  shall not be  unreasonably
withheld) and the Company agrees to indemnify and hold harmless each Indemnified
Party from and  against any loss or  liability  by reason of  settlement  of any
action effected with the consent of the Company.  In addition,  the Company will
not, without the prior written consent of the Purchasers, which consent will not
be  unreasonably  withheld,  settle or compromise or consent to the entry of any
judgment in or otherwise  seek to terminate  any pending or  threatened  action,
claim,  suit or proceeding in respect to which  indemnification  or contribution
may be  sought  hereunder  (whether  or not  any  Indemnified  Party  is a party
thereto) unless such settlement,  compromise, consent or termination includes an
express  unconditional  release  of the  Purchasers  and the  other  Indemnified
Parties,  satisfactory  in  form  and  substance  to the  Purchasers,  from  all
liability arising out of such action, claim, suit or proceeding.

     If for any reason the foregoing  indemnity is unavailable  (otherwise  than
pursuant to the express  terms of such  indemnity)  to an  Indemnified  Party or
insufficient to hold an Indemnified Party harmless, then in lieu of indemnifying
such  Indemnified  Party,  the Company  shall  contribute  to the amount paid or
payable  by such  Indemnified  Party as a result  of such  claims,  liabilities,
losses, damages, or expenses (i) in such proportion as is appropriate to reflect
the  relative  benefits  received  by the  Company  on the one  hand  and by the
Purchasers on the other from the transactions  contemplated by this Agreement or
(ii) if the allocation  provided by clause (i) is not permitted under applicable
law, in such  proportion  as is  appropriate  to reflect  not only the  relative
benefits  received  by the  Company  on the one hand and the  Purchasers  on the
other,  but also the relative fault of the Company and the Purchasers as well as
any other relevant equitable  considerations.  Notwithstanding the provisions of
this Section 13.3, the aggregate  contribution of all Indemnified  Parties shall
not exceed the amount of interest and fees actually  received by the  Purchasers
pursuant  to this  Agreement.  It is hereby  further  agreed  that the  relative
benefits  to the  Company on the one hand and the  Purchasers  on the other with
respect to the transactions contemplated hereby shall be determined by reference
to,  among other  things,  whether  any untrue or alleged  untrue  statement  of
material  fact or the  omission  or alleged  omission  to state a material  fact
related to  information  supplied  by the Company or by the  Purchasers  and the
parties'  relative intent,  knowledge,  access to information and opportunity to
correct or prevent such  statement or omission.  No Person  guilty of fraudulent
misrepresentation  (within the meaning of Section 11(f) of the  Securities  Act)
shall be  entitled  to  contribution  from any Person who was not guilty of such
fraudulent misrepresentation

     The indemnification, contribution and expense reimbursement obligations set
forth in this Section 13.3 (i) shall be in addition to any liability the Company
may have to any Indemnified Party at common law or otherwise, (ii) shall survive
the  termination  of this  Agreement and the other  Financing  Documents and the
payment in full of the Convertible Notes and (iii) shall 



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remain  operative and in full force and effect  regardless of any  investigation
made by or on behalf of the Purchasers or any other Indemnified Party.

     SECTION 13.4.  Expenses:  Documentary  Taxes. The Company agrees to pay (i)
the  out-of-pocket  costs,  expenses and other  payments in connection  with the
purchase and sale of the Securities as contemplated by this Agreement, including
the fees and  disbursements  of special  counsel for the Purchasers  incurred in
connection  with the  preparation of the Financing  Documents,  in the amount of
$25,000 (the "Reimbursement Fee"), (ii) all reasonable out-of-pocket expenses of
the Purchasers,  including fees and disbursements of counsel, in connection with
any waiver or consent  hereunder  or under any other  Financing  Document or any
amendment hereof or thereof and (iii) all reasonable  out-of-pocket  expenses of
the Purchasers and each holder of Securities,  including fees and  disbursements
of counsel, in connection with any collection,  bankruptcy, insolvency and other
enforcement  proceedings resulting therefrom. In addition, the Company agrees to
pay any and all stamp, transfer and other similar taxes,  assessments or charges
payable in connection with the execution and delivery of any Financing  Document
or the issuance of the Securities to the Purchasers, excluding their assigns.

     SECTION  13.5.  Payment.  The Company  agrees that,  so long as a Purchaser
shall own any Convertible Notes purchased by it from the Company hereunder,  the
Company will use its best efforts to cause the Transfer  Agent to make  payments
to such Purchaser (or the Company will, if authorized under Section 3.6(b), make
payments to such  Purchaser) of all amounts due thereon by wire transfer by 1:00
P.M.  (New York City  time) on the date of  payment  to the  Transfer  Agent for
disbursement to the Purchasers as required by the Transfer Agent Agreement.

     SECTION 13.6.  Successors and Assigns. This Agreement shall be binding upon
the Company and upon the Purchasers and their respective successors and assigns;
provided that the Company  shall not assign or otherwise  transfer its rights or
obligations  under this  Agreement to any other Person without the prior written
consent of the Majority  Holders.  All provisions  hereunder  purporting to give
rights to Purchasers  and their  affiliates or to holders of Securities  are for
the express benefit of such Persons and their successors and assigns.

     SECTION 13.7. Brokers.  The Company represents and warrants that it has not
employed any broker,  finder,  financial advisor or investment banker other than
Alpine  Capital  Partners,  Inc. or Whale (whose fees are summarized on Schedule
13.7)  who  would  be  entitled  to any  brokerage,  finder's  or  other  fee or
commission  payable by the Company or the Purchasers in connection with the sale
of the Securities.  Each Purchaser  hereby warrants that it has not employed any
broker, finder,  financial advisor or investment banker who would be entitled to
any  brokerage,  finder's or other fee or  commission  payable by the Company in
connection with the sale of the Securities.

     SECTION  13.8.  New York Law;  Submission to  Jurisdiction;  Waiver of Jury
Trial;  Appointment of Agent.  THIS AGREEMENT AND FINANCING  DOCUMENTS  SHALL BE
CONSTRUED IN  ACCORDANCE  WITH AND GOVERNED BY THE LAWS OF 



- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT - Page 55
(Take-Two Interactive Software, Inc.)



<PAGE>



THE STATE OF NEW YORK  WITHOUT  GIVING  EFFECT TO THE  CHOICE OF LAW  PROVISIONS
THEREUNDER.  EACH PARTY HERETO HEREBY SUBMITS TO THE NON-EXCLUSIVE  JURISDICTION
OF THE UNITED STATES  DISTRICT  COURT FOR THE NORTHERN  DISTRICT OF TEXAS AND OF
ANY TEXAS  STATE  COURT  SITTING  IN  DALLAS,  TEXAS FOR  PURPOSES  OF ALL LEGAL
PROCEEDINGS  ARISING OUT OF OR RELATING TO THIS  AGREEMENT  OR THE  TRANSACTIONS
CONTEMPLATED HEREBY. EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING
OF THE VENUE OF ANY SUCH  PROCEEDING  BROUGHT IN SUCH A COURT AND ANY CLAIM THAT
ANY SUCH PROCEEDING  BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY
JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.

     SECTION 13.9. Severability. If any term, provision, covenant or restriction
of this  Agreement is held by a court of competent  jurisdiction  to be invalid,
void or  unenforceable,  the remainder of the terms,  provisions,  covenants and
restrictions  of this Agreement  shall remain in full force and effect and shall
in no way be affected, impaired or invalidated unless a failure of consideration
would result thereby.

     SECTION 13.10 Survival. The provisions hereof shall survive the termination
of this  Agreement  and the payment in full of the  Convertible  Notes and shall
remain operative and in full force and effect,  except the  representations  and
warranties of the Company and  Purchasers  shall survive for a period of two (2)
years following the Closing.

     SECTION  13.11.  Counterparts.  This  Agreement may be executed by telecopy
signature and in any number of  counterparts  each of which shall be an original
with the same effect as if the signatures there to and hereto were upon the same
instrument.

                            [Signature Pages Follow]







- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT - Page 56
(Take-Two Interactive Software, Inc.)



<PAGE>




     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly  executed by their  respective  authorized  officers,  as of the date first
above written.

                                    TAKE-TWO INTERACTIVE SOFTWARE, INC.


                                    By: /s/  Ryan Brant
                                             -----------------------------------
                                    Name:    Ryan Brant
                                             -----------------------------------
                                    Title:   CEO
                                             -----------------------------------

                                    Address: 575 Broadway, 6th Floor
                                             New York, New York  10012
                                    Attn:    Mr. Ryan Brant



                                    INFINITY INVESTORS LIMITED


                                    By: /s/  James E. Martin
                                             -----------------------------------
                                    Name:    James E. Martin
                                             -----------------------------------
                                    Title:   Director
                                             -----------------------------------

                                    Address: 38 Hertford Street
                                             London, England WIY 7TG
                                             011-44-171-355-4975
                                    Attn:    J. A. Loughran



                                    INFINITY EMERGING OPPORTUNITIES LIMITED


                                    By: /s/  James E. Martin
                                             -----------------------------------
                                    Name:    James E. Martin
                                             -----------------------------------
                                    Title:   Director
                                             -----------------------------------

                                    Address: 38 Hertford Street
                                             London, England WIY 7TG
                                    Fax:     011-44-171-355-4975
                                    Attn:    J. A. Loughran



- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT - Page 57
(Take-Two Interactive Software, Inc.)



<PAGE>



                                    GLACIER CAPITAL LIMITED


                                    By: /s/  James E. Miller
                                             -----------------------------------
                                    Name:    James E. Miller
                                             -----------------------------------
                                    Title:   President
                                             -----------------------------------

                                    Address: 38 Hertford Street
                                             London, England WIY 7TG
                                    Fax:     011-44-171-355-4975
                                    Attn:    J. A. Loughran










                                    Address: 38 Hertford Street
                                             London, England WIY 7TG
                                    Fax:     011-44-171-355-4975
                                    Attn:    J. A. Loughran


         With a copy to:            HW Partners, L.P.
                                    1601Elm Street
                                    4000 Thanksgiving Tower
                                    Dallas, Texas  75201
                                    Telephone:  (214) 720-1689
                                    Fax:  (214) 720-1662
                                    Attn:  Stuart Chasanoff, Esq.





- --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT - Page 58
(Take-Two Interactive Software, Inc.)



<PAGE>



                                    SCHEDULES
                                    ---------

Schedule 2.1    -   Pro Rata Portion of Securities
Schedule 5.10   -   Investments, Joint Ventures
Schedule 5.13   -   Capitalization
Schedule 5.16   -   Leases
Schedule 5.21  -   .
 Liens
Schedule 7.1(m) -   Waivers of Registration Rights
Schedule 8.12   -   Transactions with Affiliates
Schedule 13.7       Broker Fees


                                    EXHIBITS
                                    --------

Exhibit A   -       Form of Convertible Note
Exhibit B   -       Form of Notice of Conversion
Exhibit C   -       Form of Notice of Exercise
Exhibit D   -       Form of Registration Rights Agreement
Exhibit E   -       Form of Solvency Certificate
Exhibit F   -       Form of Officer's Certificate
Exhibit G   -       Form of Transfer Agent Agreement
Exhibit H   -       Form of Warrant
Exhibit I   -       Form of Company Counsel's Opinion
Exhibit J   -       Form of Security Agreement
Exhibit K   -       Form of Lockbox Agreement
Exhibit L   -       Form of Subsidiary Security Agreement





<PAGE>





                                  SCHEDULE 2.1


                       CONVERTIBLE NOTES [to be confirmed]


- --------------------------------------------------------------------------------
                                                         Aggregate Principal
        Name                      Purchase Price          Amount of Notes
- --------------------------------------------------------------------------------
Infinity Investors Limited           $2,092,000                $2,200,000
- --------------------------------------------------------------------------------
Infinity  Emerging
  Opportunities Limited                $960,000                $1,000,000
- --------------------------------------------------------------------------------
Glacier Capital Limited                $960,000                $1,000,000
- --------------------------------------------------------------------------------


                                  GRANT SHARES

- --------------------------------------------------------------------------------
        Name                                             Number of Shares
- --------------------------------------------------------------------------------
Infinity Investors Limited                                     27,000
- --------------------------------------------------------------------------------
Infinity  Emerging                             
  Opportunities Limited                                        11,500
- --------------------------------------------------------------------------------
Glacier Capital Limited                                        11,500
- --------------------------------------------------------------------------------
                                         

                                    WARRANTS

- --------------------------------------------------------------------------------
        Name                                                  Warrants          
- --------------------------------------------------------------------------------
Infinity Investors Limited                                    135,000           
- --------------------------------------------------------------------------------
Infinity  Emerging                                                              
  Opportunities Limited                                        57,500           
- --------------------------------------------------------------------------------
Glacier Capital Limited                                        57,500           
- --------------------------------------------------------------------------------
                                                                          




<PAGE>





                                  SCHEDULE 5.10

                    Investments, Joint Ventures, Subsidiaries

                    Inventory Management Systems, Inc.

                    Take-Two Interactive Software Europe Limited

                    Alternative Reality Technologies, Inc.

                    Mission Studios Corporation





<PAGE>





                                  SCHEDULE 5.13

                      Capitalization as of October 14, 1997


     Outstanding Securities:

         Form of Securities                         Amount Outstanding
         ------------------                         ------------------

         $.01 Common Stock                               9,195,043
         Public Warrants                                 1,890,000
         Underwriter's Warrants                            320,000
         Options under 1994 Option Plan                    879,991
         Options under 1997 Option Plan                    275,000
         Non-Plan Options                                   80,320
         $.01 Warrants                                     391,199
                                                        ----------
                                    (fully diluted)     12,981,553
                                                        ==========






<PAGE>





                                  SCHEDULE 5.16

                          Leases as of October 14, 1997


     Capital Leases with value greater than $100,000.

          1.   Computer/Software  Package  lease with U.S.  Media Capital in the
               amount of $340,000.

          2.   Computer  Equipment  and  software  leases  (2)  with  Lighthouse
               Capital in the amounts of $110,450 and $54,540, respectively.

     Operating Leases with annual rental greater than $100,000.

          None.






<PAGE>



                                  SCHEDULE 5.21

                          Liens as of October 14, 1997


1.   Security interest in all existing and after-acquired  personal property and
     fixtures of the Company and the proceeds thereof in favor of Citibank, N.A.
     securing all  obligations  of the Company to Citibank,  including  advances
     under $250,000 line of credit.

2.   Security interest in all existing and  after-acquired  personal property of
     the Company in favor of National Bank of Canada,  New York Branch,  and the
     proceeds  thereof  securing all obligations of the Company to National Bank
     of Canada, New York branch, including an $800,000 term loan.

3.   Capital leases of computer  equipment and software  between the Company and
     AT&T Leasing Services, U.S. Media Capital and Lighthouse Capital.

4.   Security interest in all existing and after-acquired  personal property and
     fixtures of Inventory  Management Systems,  Inc. ("IMSI"),  a Subsidiary of
     the Company, in the favor of Crestar Bank ("Crestar"),  Richmond, Virginia,
     and the  proceeds  thereof,  securing all  obligations  of IMSI to Crestar,
     including advances under a $250,000 line of credit.

5.   Security interest in all existing personal property of Take-Two Interactive
     Software Europe Limited ("Take-Two  Europe"),  a Subsidiary of the Company,
     and the proceeds  thereof,  securing all  obligations of Take-Two Europe to
     Barclays Bank,  United Kingdom,  including  advances under a 500,000 pounds
     (UK) line of credit.

6.   Pledge of shares of common stock of Mission  Studios  Corporation to Thomas
     Ptak to secure payment of a promissory note issued by the Company to Thomas
     Ptak having a principal balance of approximately of $221,000.








<PAGE>





                                  SCHEDULE 5.24

                    Registration Rights as of October 1, 1997

     GameTek, Inc.:

          406,553 shares of Common Stock (one holder)







<PAGE>





                                  SCHEDULE 8.12


                          Transactions with Affiliates


     None.





<PAGE>






                                  SCHEDULE 13.7

                                   Broker Fees


   None, except for any fees payable to Whale Securities, Co., L.P. and Alpine
                   Capital Partners, Inc. [Describe How Much]





<PAGE>





                                    EXHIBIT C

                      FORM OF NOTICE OF EXERCISE - WARRANT

                (To be executed only upon exercise or conversion
                       of the Warrant in whole or in part)

To Take-Two Interactive Software, Inc.

     The  undersigned  registered  holder  of the  accompanying  Warrant  hereby
exercises  such  Warrant or  portion  thereof  for,  and  purchases  thereunder,
______________(1)  shares  of Common  Stock (as  defined  in such  Warrant)  and
herewith makes payment  therefor in the amount and manner set forth below, as of
the date written below. The undersigned  requests that the certificates for such
shares  of  Common  Stock  be  issued  in  the  name  of,  and   delivered   to,
_________________________________  whose   address is __________________________

_________________________________.

     The Exercise Price is paid as follows:

     |_|  Bank draft payable to the Company in the amount of $__________.

     |_|  Wire  transfer  to  the  account  of the  Company  in  the  amount  of
          $________.
         
     |_|  Delivery of  ___________  previously  held shares  having an aggregate
          Market Value of $_________.
         
     |_|  Cashless  exercise.  Surrender of __________ shares  purchasable under
          this  Warrant  for such  shares of Common  Stock  issuable in exchange
          therefor  pursuant to the Cashless  Exercise  provisions of the within
          Warrant, as provided in Section 1.1(iv) thereto.

     Upon  exercise  pursuant to this Notice of Exercise,  the holder will be in
compliance  with the  Limitation  on  Exercise  (as  defined  in the  Securities
Purchase Agreement pursuant to which this Warrant was issued).

Dated:  ____________________

                                         _______________________________________
                                         (Name must conform to name of holder as
                                         specified on the face of the Warrant)

                                         By:___________________________________


(1)  Insert  the number of shares of Common  Stock as to which the  accompanying
     Warrant  is being  exercised.  In the  case of a  partial  exercise,  a new
     Warrant  or  Warrants  will  be  issued  and  delivered,  representing  the
     unexercised portion of the accompanying Warrant, to the holder surrendering
     the same.




<PAGE>

                                         Name:_________________________________
                              
                                         Title:________________________________

Address of holder:                       ______________________________________

                                         ______________________________________

                                         ______________________________________


Date of exercise:____________________




THE  SECURITIES  REPRESENTED  HEREBY HAVE NOT BEEN  REGISTERED  UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF BY
PURCHASING  SUCH  SECURITIES  AGREES FOR THE  BENEFIT OF THE  COMPANY  THAT SUCH
SECURITIES  MAY BE  OFFERED,  SOLD  OR  OTHERWISE  TRANSFERRED  ONLY  (A) TO THE
COMPANY,  (B) PURSUANT TO THE  EXEMPTION  FROM  REGISTRATION  UNDER THE 1933 ACT
PROVIDED BY RULE 144 THEREUNDER,  IF AVAILABLE,  OR (C) IF REGISTERED  UNDER THE
1933 ACT AND  APPLICABLE  STATE  SECURITIES  LAWS.  IN  ADDITION,  A  SECURITIES
PURCHASE  AGREEMENT DATED AS OF THE DATE HEREOF, A COPY OF WHICH MAY BE OBTAINED
FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE,  CONTAINS CERTAIN ADDITIONAL
AGREEMENTS AMONG THE PARTIES,  INCLUDING,  WITHOUT LIMITATION,  PROVISIONS WHICH
(A) LIMIT THE  CONVERSION  RIGHTS  OF THE  HOLDER,  (B)  SPECIFY  VOLUNTARY  AND
MANDATORY  REPAYMENT,  PREPAYMENT AND REDEMPTION  RIGHTS AND OBLIGATIONS AND (C)
SPECIFY EVENTS OF DEFAULT  FOLLOWING  WHICH THE REMAINING  BALANCE DUE AND OWING
HEREWITH MAY BE ACCELERATED.


No. 1                                                       $2,200,000

                       TAKE-TWO INTERACTIVE SOFTWARE, INC.

                                Convertible Note


     TAKE-TWO INTERACTIVE SOFTWARE,  INC., a Delaware corporation (together with
its successors, the "Company"), for value received hereby promises
 to pay to:

                           Infinity Investors Limited

(the  "Holder")  and  registered  assigns,  the principal sum of Two Million Two
Hundred Thousand  Dollars  ($2,200,000) on the Maturity Date by wire transfer of
immediately available funds to the Holder in such coin or currency of the United
States  of  America  as at the time of  payment  shall be legal  tender  for the
payment of public and private debts, and to pay interest,  quarterly in arrears,
on (i) the last day of April,  July,  September  and December of each year until
the  Maturity  Date,  commencing  December  31, 1997  (unless  such day is not a
Business  Day,  in which  event on the next  succeeding  Business  Day) (each an
"Interest  Payment Date"),  (ii) the Maturity Date,  (iii) each Conversion Date,
and (iv) the  date  the  principal  amount  of this  Convertible  Note  shall be
declared to be or shall  automatically  become due and payable, on the principal
sum  hereof  outstanding  in like coin or  currency,  at the rates per annum set
forth below,  from the most recent  Interest  Payment Date to which interest has
been paid on this  Convertible  Note,  or if no  interest  has been paid on this
Convertible  Note, from the date of this  Convertible Note until payment in full
of the principal sum hereof has been made.


- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 1 - Page 1
(Take-Two interactive Software, Inc.)



<PAGE>



     The  interest  rate shall be ten  percent  (10%) per annum  (the  "Interest
Rate") or, if less,  the maximum rate  permitted  by  applicable  law.  Past due
amounts  (including  interest,  to the extent permitted by law) will also accrue
interest at the Interest Rate plus four percent (4%) per annum or, if less,  the
maximum  rate  permitted  by  applicable  law,  and will be  payable  on demand.
Interest on this  Convertible  Note will be calculated on the basis of a 360-day
year of twelve 30 day months.  All payments of principal and interest  hereunder
shall  be made  for the  benefit  of the  Holder  pursuant  to the  terms of the
Transfer Agent Agreement.

     This  Convertible  Note  is  one  of a duly  authorized  issuance  of up to
$4,200,000  aggregate  principal amount of Convertible Notes of the Company (the
"Convertible  Note") referred to in that Securities  Purchase Agreement dated as
of the date hereof between the Company,  Infinity  Investors  Limited,  Infinity
Emerging  Opportunities  Limited,  Glacier  Capital  Limited and Summit  Capital
Limited  (as the same may be amended  from time to time in  accordance  with its
terms, the "Agreement").  The Agreement contains certain  additional  agreements
among the parties with respect to the terms of this Convertible Note, including,
without  limitation,  provisions  which (i) limit the  conversion  rights of the
Holder,  (ii)  specify  voluntary  and  mandatory   repayment,   prepayment  and
redemption rights and obligations, and (iii) specify Events of Default following
which the remaining balance due and owing hereunder may be accelerated. All such
provisions are an integral part of this  Convertible  Note and are  incorporated
herein by reference. This Convertible Note is transferable and assignable to one
or  more  purchasers  in  accordance  with  the  limitations  set  forth  in the
Agreement.

     The  Company  shall  keep  through  the  Transfer  Agent  a  register  (the
"Register")  in which shall be entered the names and addresses of the registered
holder of this Convertible Note and particulars of this Convertible Note held by
such holder and of all  transfers of this  Convertible  Note.  References to the
Holder  or  "Holders"  shall  mean the  Person  listed  in the  Register  as the
registered  holder of this  Convertible  Note. The ownership of this Convertible
Note shall be proven by the Register.

     l.  Certain  Terms  Defined.  All terms  defined in the  Agreement  and not
otherwise  defined herein shall have for purposes  hereof the meanings  provided
for therein.

     2. Covenants. Unless the Majority Holders otherwise consent in writing, the
Company  covenants and agrees to observe and perform each of its obligations and
undertakings contained in the Agreement,  which obligations and undertakings are
expressly assumed herein by the Company and made for the benefit of the Holders.

     3. Payment and  Prepayment  of Principal of  Convertible  Note.  Subject to
Section 3.2 of the  Agreement,  the Company  shall  repay the  remaining  unpaid
balance of this  Convertible Note at the Formula Price on the Maturity Date. The
Company  may,  and  shall be  obligated  to,  prepay  all or a  portion  of this
Convertible  Note at either the Par Value  Redemption Price or Formula Price, as
applicable, on the terms and conditions specified in the Agreement.


- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 1 - Page 2
(Take-Two interactive Software, Inc.)



<PAGE>




     4.1 Conversion of Convertible Note. The Holder shall have the right, at its
option, at any time, and from time to time, after (i) the occurrence of an Event
of Default or (ii) February 28, 1998,  whichever shall occur earlier, to convert
the principal amount of this Convertible  Note, or any portion of such principal
amount that is $1,000 or an integral multiple thereof, into that number of fully
paid and  nonassessable  shares of Common  Stock (as such  shares  shall then be
constituted)  obtained  by  dividing  the  aggregate  principal  amount  of this
Convertible  Note or portion  thereof  subject to conversion  by the  applicable
Conversion Price. The Holder is not entitled to any rights of a holder of Common
Stock until such holder has converted its  Convertible  Note to Common Stock and
only to the extent such  Convertible  Note is deemed to have been  converted  to
Common  Stock  under  Section  4.2 below.  Notwithstanding  the  foregoing,  the
conversion  rights of the Holder set forth herein shall be limited to the extent
set forth in the Agreement.

     4.2 When  Conversion  Effective.  The conversion of this  Convertible  Note
shall be deemed to have been  effected  at 8:00 a.m.  on the  Business  Day (the
"Conversion  Date") on which the  Holder of this  Convertible  Note  shall  have
delivered, prior to 4:00 p.m., Dallas, Texas time, to the Transfer Agent, with a
copy to the Company  (including  delivery via  facsimile),  a written  notice of
conversion substantially in the form annexed to the Agreement (each a "Notice of
Conversion").  At such time the  Person or  Persons  in whose  name or names any
certificate  or  certificates  for shares of Common Stock shall be issuable upon
such  conversion  shall be deemed to have become the holder or holders of record
thereof.

     4.3  Delivery  of Stock  Certificates.  etc. As soon as  practicable  after
conversion of this  Convertible  Note,  in whole or in part,  the Company at its
expense  (including the payment by it of any applicable  issue taxes) will cause
to be issued in the name of and delivered to the holder hereof or as such holder
(upon payment by such holder of any  applicable  transfer  taxes) may direct,  a
certificate or certificates for the number of duly  authorized,  validly issued,
fully paid and  nonassessable  shares of Common Stock to which such holder shall
be entitled upon such conversion  plus, in lieu of any fractional share to which
such holder would  otherwise  be  entitled,  cash in an amount equal to the same
fraction of the Closing Bid Price per share on the Business  Day next  preceding
the Conversion Date.

     5.  Modification of Convertible Note. This Convertible Note may be modified
without prior notice to any Holder but with the written  consent of the Majority
Holders and the Company.  However,  without the consent of each Holder affected,
an amendment,  supplement  or waiver may not (1) reduce the principal  amount of
Convertible  Notes whose  Holders must consent to an  amendment,  supplement  or
waiver,  (2) reduce the rate or extend the time for  payment of  interest on any
Convertible  Note,  (3)  reduce  the  principal  amount of or  extend  the fixed
maturity  of  any  Convertible  Note  or  alter  the  redemption  or  conversion
provisions  with  respect  thereto or (4) make any  Convertible  Note payable in
money or property other than as stated in the Convertible Note.


- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 1 - Page 3
(Take-Two interactive Software, Inc.)



<PAGE>




     6.  Miscellaneous.  This  Convertible Note shall be deemed to be a contract
made  under  the laws of the State of New York,  and for all  purposes  shall be
governed by and construed in accordance with the laws of said State. The parties
hereto, including all guarantors or endorsers, hereby waive presentment, demand,
notice,  protest  and all other  demands  and  notices  in  connection  with the
delivery,  acceptance,  performance  and enforcement of this  Convertible  Note,
except as specifically  provided herein, and assent to extensions of the time of
payment,  or forbearance or other indulgence  without notice. The Company hereby
submits to the [non-exclusive]  jurisdiction of the United States District Court
for the  Northern  District  of Texas and of any Texas  state  court  sitting in
Dallas,  Texas for purposes of all legal proceedings  arising out of or relating
to this Convertible Note. The Company  irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such  proceeding  brought in such a court and any claim that
any such proceeding  brought in such a court has been brought in an inconvenient
forum. The Company hereby  irrevocably waives any and all right to trial by jury
in any legal proceeding arising out of or relating to this Convertible Note.

     The Holder of this  Convertible Note by acceptance of this Convertible Note
agrees  to be  bound  by the  provisions  of this  Convertible  Note  which  are
expressly binding on such Holder.





                            [Signature Page Follows]





- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 1 - Page 4
(Take-Two interactive Software, Inc.)



<PAGE>





     IN WITNESS  WHEREOF,  the  Company has caused  this  instrument  to be duly
executed.


Dated: October 14, 1997

                                        TAKE-TWO INTERACTIVE SOFTWARE,
                                        INC.


                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------









- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 1 - Page 5
(Take-Two interactive Software, Inc.)






THE  SECURITIES  REPRESENTED  HEREBY HAVE NOT BEEN  REGISTERED  UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF BY
PURCHASING  SUCH  SECURITIES  AGREES FOR THE  BENEFIT OF THE  COMPANY  THAT SUCH
SECURITIES  MAY BE  OFFERED,  SOLD  OR  OTHERWISE  TRANSFERRED  ONLY  (A) TO THE
COMPANY,  (B) PURSUANT TO THE  EXEMPTION  FROM  REGISTRATION  UNDER THE 1933 ACT
PROVIDED BY RULE 144 THEREUNDER,  IF AVAILABLE,  OR (C) IF REGISTERED  UNDER THE
1933 ACT AND  APPLICABLE  STATE  SECURITIES  LAWS.  IN  ADDITION,  A  SECURITIES
PURCHASE  AGREEMENT DATED AS OF THE DATE HEREOF, A COPY OF WHICH MAY BE OBTAINED
FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE,  CONTAINS CERTAIN ADDITIONAL
AGREEMENTS AMONG THE PARTIES,  INCLUDING,  WITHOUT LIMITATION,  PROVISIONS WHICH
(A) LIMIT THE  CONVERSION  RIGHTS  OF THE  HOLDER,  (B)  SPECIFY  VOLUNTARY  AND
MANDATORY  REPAYMENT,  PREPAYMENT AND REDEMPTION  RIGHTS AND OBLIGATIONS AND (C)
SPECIFY EVENTS OF DEFAULT  FOLLOWING  WHICH THE REMAINING  BALANCE DUE AND OWING
HEREWITH MAY BE ACCELERATED.


No. 2                                                            $1,000,000

                       TAKE-TWO INTERACTIVE SOFTWARE, INC.

                                Convertible Note


     TAKE-TWO INTERACTIVE SOFTWARE,  INC., a Delaware corporation (together with
its successors, the "Company"), for value received hereby promises
 to pay to:

                     Infinity Emerging Opportunities Limited

(the "Holder") and registered assigns,  the principal sum of One Million Dollars
($1,000,000)  on the Maturity  Date by wire  transfer of  immediately  available
funds to the Holder in such coin or currency of the United  States of America as
at the time of  payment  shall be legal  tender  for the  payment  of public and
private debts, and to pay interest, quarterly in arrears, on (i) the last day of
April,  July,  September  and  December  of each year until the  Maturity  Date,
commencing  December 31, 1997  (unless such day is not a Business  Day, in which
event on the next  succeeding  Business Day) (each an "Interest  Payment Date"),
(ii) the  Maturity  Date,  (iii)  each  Conversion  Date,  and (iv) the date the
principal  amount of this  Convertible  Note  shall be  declared  to be or shall
automatically become due and payable, on the principal sum hereof outstanding in
like coin or  currency,  at the rates per annum set forth  below,  from the most
recent Interest Payment Date to which interest has been paid on this Convertible
Note, or if no interest 



- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 2 - Page 1
(Take-Two interactive Software, Inc.)



<PAGE>



has been paid on this  Convertible  Note, from the date of this Convertible Note
until payment in full of the principal sum hereof has been made.

     The  interest  rate shall be ten  percent  (10%) per annum  (the  "Interest
Rate") or, if less,  the maximum rate  permitted  by  applicable  law.  Past due
amounts  (including  interest,  to the extent permitted by law) will also accrue
interest at the Interest Rate plus four percent (4%) per annum or, if less,  the
maximum  rate  permitted  by  applicable  law,  and will be  payable  on demand.
Interest on this  Convertible  Note will be calculated on the basis of a 360-day
year of twelve 30 day months.  All payments of principal and interest  hereunder
shall  be made  for the  benefit  of the  Holder  pursuant  to the  terms of the
Transfer Agent Agreement.

     This  Convertible  Note  is  one  of a duly  authorized  issuance  of up to
$4,200,000  aggregate  principal amount of Convertible Notes of the Company (the
"Convertible  Note") referred to in that Securities  Purchase Agreement dated as
of the date hereof between the Company,  Infinity  Investors  Limited,  Infinity
Emerging  Opportunities  Limited,  Glacier  Capital  Limited and Summit  Capital
Limited  (as the same may be amended  from time to time in  accordance  with its
terms, the "Agreement").  The Agreement contains certain  additional  agreements
among the parties with respect to the terms of this Convertible Note, including,
without  limitation,  provisions  which (i) limit the  conversion  rights of the
Holder,  (ii)  specify  voluntary  and  mandatory   repayment,   prepayment  and
redemption rights and obligations, and (iii) specify Events of Default following
which the remaining balance due and owing hereunder may be accelerated. All such
provisions are an integral part of this  Convertible  Note and are  incorporated
herein by reference. This Convertible Note is transferable and assignable to one
or  more  purchasers  in  accordance  with  the  limitations  set  forth  in the
Agreement.

     The  Company  shall  keep  through  the  Transfer  Agent  a  register  (the
"Register")  in which shall be entered the names and addresses of the registered
holder of this Convertible Note and particulars of this Convertible Note held by
such holder and of all  transfers of this  Convertible  Note.  References to the
Holder  or  "Holders"  shall  mean the  Person  listed  in the  Register  as the
registered  holder of this  Convertible  Note. The ownership of this Convertible
Note shall be proven by the Register.

     l.  Certain  Terms  Defined.  All terms  defined in the  Agreement  and not
otherwise  defined herein shall have for purposes  hereof the meanings  provided
for therein.

     2. Covenants. Unless the Majority Holders otherwise consent in writing, the
Company  covenants and agrees to observe and perform each of its obligations and
undertakings contained in the Agreement,  which obligations and undertakings are
expressly assumed herein by the Company and made for the benefit of the Holders.

     3. Payment and  Prepayment  of Principal of  Convertible  Note.  Subject to
Section 3.2 of the  Agreement,  the Company  shall  repay the  remaining  unpaid
balance of this  Convertible Note at the Formula Price on the Maturity Date. The
Company  may,  and  shall be  



- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 2 - Page 2
(Take-Two interactive Software, Inc.)



<PAGE>



obligated to, prepay all or a portion of this Convertible Note at either the Par
Value  Redemption  Price or  Formula  Price,  as  applicable,  on the  terms and
conditions specified in the Agreement.

     4.1 Conversion of Convertible Note. The Holder shall have the right, at its
option, at any time, and from time to time, after (i) the occurrence of an Event
of Default or (ii) February 28, 1998,  whichever shall occur earlier, to convert
the principal amount of this Convertible  Note, or any portion of such principal
amount that is $1,000 or an integral multiple thereof, into that number of fully
paid and  nonassessable  shares of Common  Stock (as such  shares  shall then be
constituted)  obtained  by  dividing  the  aggregate  principal  amount  of this
Convertible  Note or portion  thereof  subject to conversion  by the  applicable
Conversion Price. The Holder is not entitled to any rights of a holder of Common
Stock until such holder has converted its  Convertible  Note to Common Stock and
only to the extent such  Convertible  Note is deemed to have been  converted  to
Common  Stock  under  Section  4.2 below.  Notwithstanding  the  foregoing,  the
conversion  rights of the Holder set forth herein shall be limited to the extent
set forth in the Agreement.

     4.2 When  Conversion  Effective.  The conversion of this  Convertible  Note
shall be deemed to have been  effected  at 8:00 a.m.  on the  Business  Day (the
"Conversion  Date") on which the  Holder of this  Convertible  Note  shall  have
delivered, prior to 4:00 p.m., Dallas, Texas time, to the Transfer Agent, with a
copy to the Company  (including  delivery via  facsimile),  a written  notice of
conversion substantially in the form annexed to the Agreement (each a "Notice of
Conversion").  At such time the  Person or  Persons  in whose  name or names any
certificate  or  certificates  for shares of Common Stock shall be issuable upon
such  conversion  shall be deemed to have become the holder or holders of record
thereof.

     4.3  Delivery  of Stock  Certificates.  etc. As soon as  practicable  after
conversion of this  Convertible  Note,  in whole or in part,  the Company at its
expense  (including the payment by it of any applicable  issue taxes) will cause
to be issued in the name of and delivered to the holder hereof or as such holder
(upon payment by such holder of any  applicable  transfer  taxes) may direct,  a
certificate or certificates for the number of duly  authorized,  validly issued,
fully paid and  nonassessable  shares of Common Stock to which such holder shall
be entitled upon such conversion  plus, in lieu of any fractional share to which
such holder would  otherwise  be  entitled,  cash in an amount equal to the same
fraction of the Closing Bid Price per share on the Business  Day next  preceding
the Conversion Date.

     5.  Modification of Convertible Note. This Convertible Note may be modified
without prior notice to any Holder but with the written  consent of the Majority
Holders and the Company.  However,  without the consent of each Holder affected,
an amendment,  supplement  or waiver may not (1) reduce the principal  amount of
Convertible  Notes whose  Holders must consent to an  amendment,  supplement  or
waiver,  (2) reduce the rate or extend the time for  payment of  interest on any
Convertible  Note,  (3)  reduce  the  principal  amount of or  extend  the fixed
maturity  of  any  Convertible  Note  or  alter  the  redemption  or  conversion
provisions  with 



- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 2 - Page 3
(Take-Two interactive Software, Inc.)



<PAGE>



respect  thereto or (4) make any  Convertible  Note payable in money or property
other than as stated in the Convertible Note.

     6.  Miscellaneous.  This  Convertible Note shall be deemed to be a contract
made  under  the laws of the State of New York,  and for all  purposes  shall be
governed by and construed in accordance with the laws of said State. The parties
hereto, including all guarantors or endorsers, hereby waive presentment, demand,
notice,  protest  and all other  demands  and  notices  in  connection  with the
delivery,  acceptance,  performance  and enforcement of this  Convertible  Note,
except as specifically  provided herein, and assent to extensions of the time of
payment,  or forbearance or other indulgence  without notice. The Company hereby
submits to the [non-exclusive]  jurisdiction of the United States District Court
for the  Northern  District  of Texas and of any Texas  state  court  sitting in
Dallas,  Texas for purposes of all legal proceedings  arising out of or relating
to this Convertible Note. The Company  irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such  proceeding  brought in such a court and any claim that
any such proceeding  brought in such a court has been brought in an inconvenient
forum. The Company hereby  irrevocably waives any and all right to trial by jury
in any legal proceeding arising out of or relating to this Convertible Note.

     The Holder of this  Convertible Note by acceptance of this Convertible Note
agrees  to be  bound  by the  provisions  of this  Convertible  Note  which  are
expressly binding on such Holder.





                            [Signature Page Follows]







- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 2 - Page 4
(Take-Two interactive Software, Inc.)



<PAGE>



     IN WITNESS  WHEREOF,  the  Company has caused  this  instrument  to be duly
executed.


Dated: October 14, 1997

                                        TAKE-TWO INTERACTIVE SOFTWARE,
                                        INC.


                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------









- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 2 - Page 5
(Take-Two interactive Software, Inc.)





THE  SECURITIES  REPRESENTED  HEREBY HAVE NOT BEEN  REGISTERED  UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THE HOLDER HEREOF BY
PURCHASING  SUCH  SECURITIES  AGREES FOR THE  BENEFIT OF THE  COMPANY  THAT SUCH
SECURITIES  MAY BE  OFFERED,  SOLD  OR  OTHERWISE  TRANSFERRED  ONLY  (A) TO THE
COMPANY,  (B) PURSUANT TO THE  EXEMPTION  FROM  REGISTRATION  UNDER THE 1933 ACT
PROVIDED BY RULE 144 THEREUNDER,  IF AVAILABLE,  OR (C) IF REGISTERED  UNDER THE
1933 ACT AND  APPLICABLE  STATE  SECURITIES  LAWS.  IN  ADDITION,  A  SECURITIES
PURCHASE  AGREEMENT DATED AS OF THE DATE HEREOF, A COPY OF WHICH MAY BE OBTAINED
FROM THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICE,  CONTAINS CERTAIN ADDITIONAL
AGREEMENTS AMONG THE PARTIES,  INCLUDING,  WITHOUT LIMITATION,  PROVISIONS WHICH
(A) LIMIT THE  CONVERSION  RIGHTS  OF THE  HOLDER,  (B)  SPECIFY  VOLUNTARY  AND
MANDATORY  REPAYMENT,  PREPAYMENT AND REDEMPTION  RIGHTS AND OBLIGATIONS AND (C)
SPECIFY EVENTS OF DEFAULT  FOLLOWING  WHICH THE REMAINING  BALANCE DUE AND OWING
HEREWITH MAY BE ACCELERATED.


No. 3                                                            $1,000,000

                       TAKE-TWO INTERACTIVE SOFTWARE, INC.

                                Convertible Note


     TAKE-TWO INTERACTIVE SOFTWARE,  INC., a Delaware corporation (together with
its successors, the "Company"), for value received hereby promises
 to pay to:

                             Glacier Capital Limited

(the "Holder") and registered assigns,  the principal sum of One Million Dollars
($1,000,000)  on the Maturity  Date by wire  transfer of  immediately  available
funds to the Holder in such coin or currency of the United  States of America as
at the time of  payment  shall be legal  tender  for the  payment  of public and
private debts, and to pay interest, quarterly in arrears, on (i) the last day of
April,  July,  September  and  December  of each year until the  Maturity  Date,
commencing  December 31, 1997  (unless such day is not a Business  Day, in which
event on the next  succeeding  Business Day) (each an "Interest  Payment Date"),
(ii) the  Maturity  Date,  (iii)  each  Conversion  Date,  and (iv) the date the
principal  amount of this  Convertible  Note  shall be  declared  to be or shall
automatically become due and payable, on the principal sum hereof outstanding in
like coin or  currency,  at the rates per annum set forth  below,  from the most
recent Interest Payment Date to which interest has been paid on this Convertible
Note, or if no interest 


- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 3 - Page 1
(Take-Two interactive Software, Inc.)



<PAGE>



has been paid on this  Convertible  Note, from the date of this Convertible Note
until payment in full of the principal sum hereof has been made.

     The  interest  rate shall be ten  percent  (10%) per annum  (the  "Interest
Rate") or, if less,  the maximum rate  permitted  by  applicable  law.  Past due
amounts  (including  interest,  to the extent permitted by law) will also accrue
interest at the Interest Rate plus four percent (4%) per annum or, if less,  the
maximum  rate  permitted  by  applicable  law,  and will be  payable  on demand.
Interest on this  Convertible  Note will be calculated on the basis of a 360-day
year of twelve 30 day months.  All payments of principal and interest  hereunder
shall  be made  for the  benefit  of the  Holder  pursuant  to the  terms of the
Transfer Agent Agreement.

     This  Convertible  Note  is  one  of a duly  authorized  issuance  of up to
$4,200,000  aggregate  principal amount of Convertible Notes of the Company (the
"Convertible  Note") referred to in that Securities  Purchase Agreement dated as
of the date hereof between the Company,  Infinity  Investors  Limited,  Infinity
Emerging  Opportunities  Limited,  Glacier  Capital  Limited and Summit  Capital
Limited  (as the same may be amended  from time to time in  accordance  with its
terms, the "Agreement").  The Agreement contains certain  additional  agreements
among the parties with respect to the terms of this Convertible Note, including,
without  limitation,  provisions  which (i) limit the  conversion  rights of the
Holder,  (ii)  specify  voluntary  and  mandatory   repayment,   prepayment  and
redemption rights and obligations, and (iii) specify Events of Default following
which the remaining balance due and owing hereunder may be accelerated. All such
provisions are an integral part of this  Convertible  Note and are  incorporated
herein by reference. This Convertible Note is transferable and assignable to one
or  more  purchasers  in  accordance  with  the  limitations  set  forth  in the
Agreement.

     The  Company  shall  keep  through  the  Transfer  Agent  a  register  (the
"Register")  in which shall be entered the names and addresses of the registered
holder of this Convertible Note and particulars of this Convertible Note held by
such holder and of all  transfers of this  Convertible  Note.  References to the
Holder  or  "Holders"  shall  mean the  Person  listed  in the  Register  as the
registered  holder of this  Convertible  Note. The ownership of this Convertible
Note shall be proven by the Register.

     l.  Certain  Terms  Defined.  All terms  defined in the  Agreement  and not
otherwise  defined herein shall have for purposes  hereof the meanings  provided
for therein.

     2. Covenants. Unless the Majority Holders otherwise consent in writing, the
Company  covenants and agrees to observe and perform each of its obligations and
undertakings contained in the Agreement,  which obligations and undertakings are
expressly assumed herein by the Company and made for the benefit of the Holders.

     3. Payment and  Prepayment  of Principal of  Convertible  Note.  Subject to
Section 3.2 of the  Agreement,  the Company  shall  repay the  remaining  unpaid
balance of this  Convertible Note at the Formula Price on the Maturity Date. The
Company  may,  and  shall be 


- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 3 - Page 2
(Take-Two interactive Software, Inc.)



<PAGE>




obligated to, prepay all or a portion of this Convertible Note at either the Par
Value  Redemption  Price or  Formula  Price,  as  applicable,  on the  terms and
conditions specified in the Agreement.

     4.1 Conversion of Convertible Note. The Holder shall have the right, at its
option, at any time, and from time to time, after (i) the occurrence of an Event
of Default or (ii) February 28, 1998,  whichever shall occur earlier, to convert
the principal amount of this Convertible  Note, or any portion of such principal
amount that is $1,000 or an integral multiple thereof, into that number of fully
paid and  nonassessable  shares of Common  Stock (as such  shares  shall then be
constituted)  obtained  by  dividing  the  aggregate  principal  amount  of this
Convertible  Note or portion  thereof  subject to conversion  by the  applicable
Conversion Price. The Holder is not entitled to any rights of a holder of Common
Stock until such holder has converted its  Convertible  Note to Common Stock and
only to the extent such  Convertible  Note is deemed to have been  converted  to
Common  Stock  under  Section  4.2 below.  Notwithstanding  the  foregoing,  the
conversion  rights of the Holder set forth herein shall be limited to the extent
set forth in the Agreement.

     4.2 When  Conversion  Effective.  The conversion of this  Convertible  Note
shall be deemed to have been  effected  at 8:00 a.m.  on the  Business  Day (the
"Conversion  Date") on which the  Holder of this  Convertible  Note  shall  have
delivered, prior to 4:00 p.m., Dallas, Texas time, to the Transfer Agent, with a
copy to the Company  (including  delivery via  facsimile),  a written  notice of
conversion substantially in the form annexed to the Agreement (each a "Notice of
Conversion").  At such time the  Person or  Persons  in whose  name or names any
certificate  or  certificates  for shares of Common Stock shall be issuable upon
such  conversion  shall be deemed to have become the holder or holders of record
thereof.

     4.3  Delivery  of Stock  Certificates.  etc. As soon as  practicable  after
conversion of this  Convertible  Note,  in whole or in part,  the Company at its
expense  (including the payment by it of any applicable  issue taxes) will cause
to be issued in the name of and delivered to the holder hereof or as such holder
(upon payment by such holder of any  applicable  transfer  taxes) may direct,  a
certificate or certificates for the number of duly  authorized,  validly issued,
fully paid and  nonassessable  shares of Common Stock to which such holder shall
be entitled upon such conversion  plus, in lieu of any fractional share to which
such holder would  otherwise  be  entitled,  cash in an amount equal to the same
fraction of the Closing Bid Price per share on the Business  Day next  preceding
the Conversion Date.

     5.  Modification of Convertible Note. This Convertible Note may be modified
without prior notice to any Holder but with the written  consent of the Majority
Holders and the Company.  However,  without the consent of each Holder affected,
an amendment,  supplement  or waiver may not (1) reduce the principal  amount of
Convertible  Notes whose  Holders must consent to an  amendment,  supplement  or
waiver,  (2) reduce the rate or extend the time for  payment of  interest on any
Convertible  Note,  (3)  reduce  the  principal  amount of or  extend  the fixed
maturity  of  any  Convertible  Note  or  alter  the  redemption  or  conversion
provisions  with 


- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 3 - Page 3
(Take-Two interactive Software, Inc.)



<PAGE>



respect  thereto or (4) make any  Convertible  Note payable in money or property
other than as stated in the Convertible Note.

     6.  Miscellaneous.  This  Convertible Note shall be deemed to be a contract
made  under  the laws of the State of New York,  and for all  purposes  shall be
governed by and construed in accordance with the laws of said State. The parties
hereto, including all guarantors or endorsers, hereby waive presentment, demand,
notice,  protest  and all other  demands  and  notices  in  connection  with the
delivery,  acceptance,  performance  and enforcement of this  Convertible  Note,
except as specifically  provided herein, and assent to extensions of the time of
payment,  or forbearance or other indulgence  without notice. The Company hereby
submits to the [non-exclusive]  jurisdiction of the United States District Court
for the  Northern  District  of Texas and of any Texas  state  court  sitting in
Dallas,  Texas for purposes of all legal proceedings  arising out of or relating
to this Convertible Note. The Company  irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such  proceeding  brought in such a court and any claim that
any such proceeding  brought in such a court has been brought in an inconvenient
forum. The Company hereby  irrevocably waives any and all right to trial by jury
in any legal proceeding arising out of or relating to this Convertible Note.

     The Holder of this  Convertible Note by acceptance of this Convertible Note
agrees  to be  bound  by the  provisions  of this  Convertible  Note  which  are
expressly binding on such Holder.





                            [Signature Page Follows]






- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 3 - Page 4
(Take-Two interactive Software, Inc.)



<PAGE>






     IN WITNESS  WHEREOF,  the  Company has caused  this  instrument  to be duly
executed.


Dated: October _______, 1997

                                        TAKE-TWO INTERACTIVE SOFTWARE,
                                        INC.


                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------







- --------------------------------------------------------------------------------
CONVERTIBLE NOTE NO. 3 - Page 5
(Take-Two interactive Software, Inc.)






THIS COMMON STOCK PURCHASE  WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE  "SECURITIES  ACT"); OR UNDER ANY APPLICABLE LAW OR
REGULATION  OF ANY STATE.  THIS COMMON STOCK  WARRANT MAY NOT BE SOLD,  OFFERED,
ASSIGNED OR  TRANSFERRED  UNLESS THE WARRANT IS REGISTERED  UNDER THE SECURITIES
ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES, ASSIGNMENTS AND
TRANSFERS ARE MADE PURSUANT TO THE AVAILABLE  EXEMPTIONS  FROM THE  REGISTRATION
REQUIREMENTS OF THOSE LAWS. FURTHERMORE, THESE SECURITIES ARE SUBJECT TO CERTAIN
LIMITATIONS  ON EXERCISE,  AND THE SHARES OF COMMON STOCK RECEIVED UPON EXERCISE
ARE SUBJECT TO CERTAIN  LIMITATIONS  ON SALE,  IN EACH CASE AS DESCRIBED IN THAT
CERTAIN  SECURITIES  PURCHASE  AGREEMENT  DATED THE DATE HEREOF  (THE  "PURCHASE
AGREEMENT")  BETWEEN,  AMONG OTHERS,  THE COMPANY AND THE INITIAL HOLDER HEREOF.
THIS COMMON STOCK PURCHASE  WARRANT  CERTIFICATE  REFERS TO AND IS  SPECIFICALLY
GOVERNED BY CERTAIN PROVISIONS  CONTAINED IN THE PURCHASE  AGREEMENT,  A COPY OF
WHICH IS ON FILE WITH AND MAY BE  OBTAINED  FROM THE  COMPANY  AT ITS  PRINCIPAL
PLACE OF BUSINESS.

                       TAKE-TWO INTERACTIVE SOFTWARE, INC.

                          COMMON STOCK PURCHASE WARRANT

                             DATED: October 14, 1997

- --------------------------------------------------------------------------------

                                              No. 1   Infinity
 Investors Limited
Number of Common Shares:  135,000             Holder: 38 Hertford Street
Purchase Price:           $6.46                       London, England
Expiration Date:          October 14, 2002            WIY 7TG

                            For identification only.
            The governing terms of this Warrant are set forth below.

- --------------------------------------------------------------------------------


     TAKE-TWO   INTERACTIVE   SOFTWARE,   INC.,  a  Delaware   corporation  (the
"Company"),  hereby  certifies  that,  for value  received,  Infinity  Investors
Limited or its assigns (each a "Holder"), is entitled,  subject to the terms set
forth below, to purchase from the Company at any time or from time to time after
the date hereof and prior to October 14, 2002 (the  "Exercise  Period"),  at the
Purchase Price hereafter  defined,  One Hundred  Thirty-Five  Thousand (135,000)
fully paid and nonassessable  shares of Common Stock (as hereinafter defined) of
the  Company.  The number and  character  of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided herein.

     This Warrant (this  "Warrant";  such term to include any warrants issued in
substitution  therefor)  is one of a series of Common  Stock  Purchase  Warrants
issued in  connection  with that  certain  Securities  Purchase  Agreement  (the
"Purchase  Agreement")  dated of even date herewith between,  among others,  the
initial Holder hereof and the Company.



COMMON STOCK PURCHASE WARRANT NO. 1 - Page 1                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>



     The purchase price per share of Common Stock issuable upon exercise of this
Warrant (the "Purchase Price") shall initially be $6.46; provided, however, that
the Purchase Price shall be adjusted from time to time as provided herein.

     As used herein the following terms,  unless the context otherwise requires,
have the following respective meanings:

          (a) The term "Company" shall include  Take-Two  Interactive  Software,
     Inc. and any entity that shall  succeed or assume the  obligations  of such
     corporation hereunder.

          (b) The term "Common Stock"  includes (a) the Company's  common stock,
     $.01 par  value per  share,  (b) any  other  capital  stock of any class or
     classes  (however  designated) of the Company,  authorized on or after such
     date, the holders of which shall have the right,  without  limitation as to
     amount, either to all or to a share of the balance of current dividends and
     liquidating  dividends after the payment of dividends and  distributions on
     any  shares  entitled  to  preference,  and  the  holders  of  which  shall
     ordinarily,  in the absence of  contingencies,  be entitled to vote for the
     election of a majority of directors  of the Company  (even though the right
     so to vote has been suspended by the happening of such a  contingency)  and
     (c) any other  securities  into  which or for  which any of the  securities
     described in (a) or (b) may be converted or exchanged pursuant to a plan of
     recapitalization, reorganization, merger, sale of assets or otherwise.

          (c) The term "Other Securities" refers to any stock (other than Common
     Stock) and other  securities of the Company or any other person  (corporate
     or otherwise) that the holder of this Warrant at any time shall be entitled
     to receive,  or shall have  received,  on the exercise of this Warrant,  in
     lieu of or in  addition  to  Common  Stock,  or that at any  time  shall be
     issuable  or shall have been issued in exchange  for or in  replacement  of
     Common Stock or Other Securities pursuant to Section 4 or otherwise.

          (d) The term "Market  Value" shall mean the average  closing  price of
     the Common Stock during the twenty (20)  trading  days  preceding  (but not
     excluding)  the  Exercise  Date  as  reported  on any  national  securities
     exchange or  automated  quotation  system on which the Common Stock is then
     traded (as reported by Bloomberg L.P.).

1.   Exercise of Warrant.

          1.1. Method of Exercise.  This Warrant may be exercised in whole or in
     part (but not as to a fractional  share of Common  Stock),  at any time and
     from  time to time  during  the  Exercise  Period by the  Holder  hereof by
     delivery of a notice of exercise (a "Notice of Exercise")  substantially in
     the form attached hereto as Exhibit A via facsimile to the



COMMON STOCK PURCHASE WARRANT NO. 1 - Page 2                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>



     Company. Promptly thereafter the Holder shall surrender this Warrant to the
     Company at its  principal  office,  accompanied  by payment of the Purchase
     Price  multiplied  by the  number of shares of Common  Stock for which this
     Warrant is being exercised (the "Exercise Price").  Payment of the Exercise
     Price  shall be made,  at the  option of the  Holder,  (i) by check or bank
     draft  payable to the order of the  Company,  (ii) by wire  transfer to the
     account of the  Company,  (iii) in shares of Common  Stock  having a Market
     Value on the Exercise Date (as hereinafter  defined) equal to the aggregate
     Exercise Price or (iv) by presentation and surrender of this Warrant to the
     Company for cashless exercise (a "Cashless Exercise"),  with such surrender
     being deemed a waiver of the Holder's  obligation to pay all or any portion
     of the Exercise Price.  In the event the Holder elects a Cashless  Exercise
     (which such election shall be  irrevocable)  the Holder shall exchange this
     Warrant for that number of shares of Common Stock determined by multiplying
     the  number  of shares of  Common  Stock as to which the  Warrant  is being
     exercised by a fraction,  the  numerator  of which shall be the  difference
     between the then current Market Value of the issued and outstanding  Common
     Stock and the Purchase  Price,  and the  denominator  of which shall be the
     then current Market Value of the issued and  outstanding  Common Stock.  If
     the amount of the payment received by the Company is less than the Exercise
     Price, the Holder will be notified of the deficiency and shall make payment
     in that amount  within  five (5)  business  days.  In the event the payment
     exceeds the Exercise Price,  the Company will promptly refund the excess to
     the  Holder.  Upon  exercise,  the Holder  shall be  entitled  to  receive,
     promptly  after payment in full,  one or more  certificates,  issued in the
     Holder's name or in such name or names as the Holder may direct, subject to
     the limitations on transfer  contained herein,  for the number of shares of
     Common Stock so  purchased.  The shares so purchased  shall be deemed to be
     issued as of the close of business  on the date on which the Company  shall
     have  received from the Holder  payment in full of the Exercise  Price (the
     "Exercise Date").

          1.2.  Regulation D  Restrictions.  The Holder  hereof  represents  and
     warrants to the Company that it has acquired  this Warrant and  anticipates
     acquiring the shares of Common Stock  issuable upon exercise of the Warrant
     solely for its own account for  investment  purposes and not with a view to
     or for resale of such  securities  unless such  resale has been  registered
     with the Securities and Exchange  Commission or an applicable  exemption is
     available therefor. At the time this Warrant is exercised,  the Company may
     require the Holder to state in the Notice of Exercise such  representations
     concerning the Holder as are necessary or appropriate to assure  compliance
     by the Holder with the Securities Act.

          1.3.  Company  Acknowledgment.  The Company  will,  at the time of the
     exercise  of  this  Warrant,   upon  the  request  of  the  Holder  hereof,
     acknowledge  in writing its  continuing  obligation to afford to the Holder
     any rights to which the Holder  shall  continue to be  entitled  after such
     exercise in accordance  with the provisions of this Warrant.  If the Holder
     shall  fail to make any such  request,  such  failure  shall not affect the
     continuing  obligation  of the  Company  to afford to the  Holder  any such
     rights.




COMMON STOCK PURCHASE WARRANT NO. 1 - Page 3                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>



          1.4. Limitation on Exercise.  Notwithstanding the rights of the Holder
     to exercise  all or a portion of this  Warrant as  described  herein,  such
     exercise  rights  shall be  limited  solely in the  manner set forth in the
     Purchase  Agreement  as if such  provisions  were  specifically  set  forth
     herein.

2. Delivery of Stock  Certificates,  etc., on Exercise.  As soon as  practicable
after the  exercise of this  Warrant,  and in any event  within the time periods
specified in the Purchase  Agreement,  the Company at its expense (including the
payment by it of any applicable issue,  stamp or transfer taxes upon issuance to
the Holder)  will cause to be issued in the name of and  delivered to the Holder
thereof,  or, to the extent permissible  hereunder,  to such other person as the
Holder may direct,  a certificate or  certificates  for the number of fully paid
and  nonassessable  shares of Common  Stock (or Other  Securities)  to which the
Holder shall be entitled on such exercise, plus, in lieu of any fractional share
to which the Holder would  otherwise be  entitled,  cash equal to such  fraction
multiplied by the then applicable Purchase Price,  together with any other stock
or other securities and property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise.

3.  Adjustment for  Extraordinary  Events.  The Purchase Price to be paid by the
Holder upon  exercise of this  Warrant  shall be adjusted in case at any time or
from time to time the Company  should (i)  subdivide the  outstanding  shares of
Common Stock into a greater number of shares,  (ii)  consolidate the outstanding
shares of Common  Stock into a smaller  number of shares,  (iii) issue shares of
Common Stock or securities convertible into or exchangeable for shares of Common
Stock as a  dividend  to all or  substantially  all  holders of shares of Common
Stock or (iv) issue by reclassification of shares of Common Stock, any shares of
capital  stock of the  Company,  in each  event  pursuant  to  Article  X of the
Purchase Agreement as if such provisions were specifically set forth herein.

4. Exercise Price Reset.

          4.1  Adjustment  to  Purchase  Price if  Additional  Grant  Shares are
     Issued.  If the Company is obligated to issue any  Additional  Grant Shares
     (as  defined  in the  Purchase  Agreement),  the  Purchase  Price  shall be
     adjusted so that this Warrant  will have a "value"  equal to the "value" of
     this  Warrant as of its  original  date of issue.  For the purposes of this
     Section  4, the term  "value"  shall  mean a good  faith  valuation  of the
     theoretical trade price of this Warrant,  prepared by HW Partners, L.P. (or
     such other entity as  designated by the Holder)  using a  Black-Scholes  or
     similar  model and using as the  "market  price"  for such model the market
     Price (as defined in the Purchase  Agreement)  used to determine the number
     of Additional Grant Shares.

          4.2 Notice of Warrant Value.  Within seven (7) business days after the
     Closing  Date (as such  term is  defined  in the  Purchase  Agreement),  HW
     Partners,  L.P.  will deliver to the Company a  certificate  describing  in
     reasonable  detail the  calculation  of the value of this  Warrant.  Within
     seven (7)  business  days after the date on which the number of  Additional
     Grant Shares is calculated (if any), HW Partners,  L.P. will deliver to the





COMMON STOCK PURCHASE WARRANT NO. 1 - Page 4                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>



     Company a certificate  indicating in reasonable detail, (1) its calculation
     of the value of this Warrant as of such date and (2) its  determination  of
     the new  Purchase  Price for this  Warrant as of such date.  If there is no
     dispute as to the adjustment to the Purchase Price, the Company shall cause
     its  auditors  to deliver a notice of  adjustment  pursuant to Section 9 of
     this  Warrant as promptly  as  practicable  (but  within ten (10)  business
     days.).

          4.3  Dispute  as to  Warrant  Value.  In the  event  that the  Company
     disputes any  calculation of Warrant value under this Section 4, the matter
     shall  be  referred   to  an   Independent   Financial   Expert  for  final
     determination; provided that the Company notifies HW Partners, L.P. of such
     dispute within five (5) business days of written receipt of any certificate
     of  Warrant  value.  For  purposes  of this  Section  4.3,  an  Independent
     Financial Expert shall mean a nationally recognized investment banking firm
     (i)  which  does not (and  whose  directors,  officers  and  employees  and
     affiliates do not), have a direct or indirect  financial interest in either
     the  Company  or any  holder  of  this  Warrant  (other  than a  beneficial
     ownership,  directly  or  indirectly,  of  less  than  one  percent  of the
     outstanding  shares of capital  stock of the  Company),  (ii) which has not
     been,  and,  at the time it is called  upon to give  independent  financial
     services to the  Company,  is not (and none of whose  directors,  officers,
     employees or affiliates is) a promoter,  director or officer of the Company
     or any of its  affiliates  or an  underwriter  with  respect  to any of the
     Company's  securities,  (iii) which does not provide any advice or opinions
     to the Company or any Warrant  holder  except as an  Independent  Financial
     Expert and (iv) which is mutually  agreeable to the Company and the holders
     of a majority of the Warrants. If the Company and the holders of a majority
     of the  Warrants  do not  promptly  agree as to the  Independent  Financial
     Expert, each shall appoint one investment banking firm and the two firms so
     appointed shall select the Independent  financial  Expert to be employed by
     the Company.  An Independent  Financial  Expert shall be compensated by the
     Company for  opinions or services it provides as an  Independent  Financial
     Expert.  In making  its  determination  of the value of this  Warrant,  the
     Independent  Financial Expert shall use one or more valuation  methods that
     the Independent Financial Expert, in its professional judgment,  determines
     to be most appropriate. After the Independent Financial Expert has made its
     determination,  the Company shall cause the Independent Financial Expert to
     prepare  a report (a "Value  Report")  stating  the  methods  of  valuation
     considered or used and the value of the Warrant or other security it values
     and  containing a statement  as to the nature and scope of the  examination
     made.  Such Value Report shall  accompany any notice of adjustment  sent by
     the Company to the Holder  pursuant  to this  Warrant;  provided,  that the
     adjustment  to the  Exercise  Price  that is the  subject  of  such  notice
     requires the services of any Independent Financial Expert.

     5. No Impairment.  The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization,  transfer of assets, consolidation,
merger, dissolution,  issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant,  but will at all times in good faith  assist in the carrying out of all
such terms and in the taking of all such action as may be


COMMON STOCK PURCHASE WARRANT NO. 1 - Page 5                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>

necessary  or  appropriate  in order to protect the rights of the Holder of this
Warrant against  impairment.  Without  limiting the generality of the foregoing,
the  Company  (a)  will  not  increase  the par  value  of any  shares  of stock
receivable on the exercise of this Warrant above the amount payable  therefor on
such exercise,  (b) will take all such action as may be necessary or appropriate
in  order  that the  Company  may  validly  and  legally  issue  fully  paid and
nonassessable  shares of stock on the  exercise of this Warrant and (c) will not
transfer  all or  substantially  all of its  properties  and assets to any other
person  (corporate or otherwise),  or  consolidate  with or merge into any other
person or permit any such person to  consolidate  with or merge into the Company
(if the Company is not the  surviving  person),  unless such other  person shall
expressly assume in writing and will be bound by all the terms of this Warrant.

     6.  Accountants'  Certificate  as to  Adjustments.  In  each  case  of  any
adjustment or readjustment  in the shares of Common Stock (or Other  Securities)
or the Purchase Price  issuable on the exercise of this Warrant,  the Company at
its expense will cause  independent  certified  public  accountants  of national
standing  selected  by the  Company  (which may be the  Company's  auditors)  to
compute such  adjustment or  readjustment  in accordance  with the terms of this
Warrant and prepare a certificate  setting forth such adjustment or readjustment
and showing in detail the facts upon which such  adjustment or  readjustment  is
based,  including a statement of (a) the consideration received or receivable by
the  Company for any  additional  shares of Common  Stock (or Other  Securities)
issued or sold or deemed to have been  issued or sold,  (b) the number of shares
of Common Stock (or Other  Securities)  outstanding  or deemed to be outstanding
and (c) the  Purchase  Price and the  number  of  shares  of Common  Stock to be
received  upon  exercise of this Warrant,  in effect  immediately  prior to such
issue or sale and as adjusted and  readjusted as provided in this  Warrant.  The
Company will  forthwith  mail a copy of each such  certificate  to the Holder of
this Warrant, and will, on the written request at any time of the Holder of this
Warrant,  furnish to the Holder a like  certificate  setting  forth the Purchase
Price at the time in effect and showing how it was calculated.

     7. Notices of Record Date, etc. In the event of

          (a) any taking by the  Company of a record of the holders of any class
     of securities  for the purpose of determining  the holders  thereof who are
     entitled to receive any  dividend  or other  distribution,  or any right to
     subscribe  for,  purchase or  otherwise  acquire any shares of stock of any
     class or any other  securities or property,  or to receive any other right,
     or

          (b) any capital reorganization of the Company, any reclassification or
     recapitalization of the capital stock of the Company or any transfer of all
     or  substantially  all the assets of the  Company to, or  consolidation  or
     merger of the Company with or into, any other person, or

          (c)  any  voluntary  or   involuntary   dissolution,   liquidation  or
     winding-up of the Company,


COMMON STOCK PURCHASE WARRANT NO. 1 - Page 6                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>

then, and in each such event, the Company will mail or cause to be mailed to the
Holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the  purpose of such  dividend,  distribution  or right,  and
stating the amount and character of such dividend,  distribution  or right,  and
(ii)   the   date  on   which   any   such   reorganization,   reclassification,
recapitalization,  transfer, consolidation,  merger, dissolution, liquidation or
winding-up  is to take place,  and the time,  if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other  Securities)  for  securities or other property
deliverable   on  such   reorganization,   reclassification,   recapitalization,
transfer,  consolidation,  merger, dissolution,  liquidation or winding-up. Such
notice  shall be mailed  at least 20 days  prior to the date  specified  in such
notice on which any action is to be taken.

     8. Reservation of Stock, etc. Issuable on Exercise of Warrant.  The Company
will at all times reserve and keep  available,  solely for issuance and delivery
on the  exercise  of  this  Warrant,  all  shares  of  Common  Stock  (or  Other
Securities) from time to time issuable on the exercise of this Warrant.

     9. Exchange of Warrant. On surrender for exchange of this Warrant, properly
endorsed,  to the Company,  the Company at its expense will issue and deliver to
or on the order of the holder  thereof a new Warrant of like tenor,  in the name
of such Holder or as such  Holder (on  payment by such holder of any  applicable
transfer  taxes)  may  direct,  calling  in the  aggregate  on the face or faces
thereof for the number of shares of Common  Stock  called for on the face of the
Warrant so surrendered.

     10. Replacement of Warrant. On receipt of evidence reasonably  satisfactory
to the Company of the loss,  theft,  destruction  or  mutilation of this Warrant
and, in the case of any such loss,  theft or  destruction  of this  Warrant,  on
delivery of an indemnity agreement or security  reasonably  satisfactory in form
and amount to the Company or, in the case of any such  mutilation,  on surrender
and  cancellation  of this Warrant,  the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.

     11. Remedies. The Company stipulates that the remedies at law of the Holder
of this Warrant in the event of any default by the Company in the performance of
or  compliance  with any of the  terms of this  Warrant  are not and will not be
adequate,  and that such terms may be specifically  enforced by a decree for the
specific  performance  of any  agreement  contained  herein or by an  injunction
against a violation of any of the terms hereof or otherwise.

     12. Negotiability, etc. This Warrant is issued upon the following terms, to
all of which each  Holder or owner  hereof by the  taking  hereof  consents  and
agrees:

          (a) title to this Warrant may be transferred  by  endorsement  (by the
     Holder  hereof  executing  the form of  assignment  at the end  hereof) and
     delivery  in the  same  manner  as in the case of a  negotiable  instrument
     transferable by endorsement and delivery;



COMMON STOCK PURCHASE WARRANT NO. 1 - Page 7                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>

          (b) any person in  possession  of this  Warrant  properly  endorsed is
     authorized to represent  himself as absolute  owner hereof and is empowered
     to transfer  absolute title hereto by endorsement  and delivery hereof to a
     bona fide purchaser hereof for value;  each prior taker or owner waives and
     renounces  all of his  equities or rights in this  Warrant in favor of each
     such bona fide  purchaser,  and each such bona fide purchaser shall acquire
     absolute title hereto and to all rights represented hereby;

          (c) until this Warrant is transferred on the books of the Company, the
     Company may treat the registered Holder hereof as the absolute owner hereof
     for all purposes, notwithstanding any notice to the contrary; and

          (d)  notwithstanding  the  foregoing,  this  Warrant  may not be sold,
     transferred  or  assigned  except  pursuant  to an  effective  registration
     statement  under the  Securities  Act of 1933, as amended (the "Act"),  or,
     pursuant to an applicable exemption therefrom (including in accordance with
     Regulation D promulgated under the Act).

     13. Registration Rights. The Company is obligated to register the shares of
Common Stock issuable upon exercise of this Warrant in accordance with the terms
of a Registration  Rights Agreement between the Company and the Holder dated the
date hereof.

     14. Notices,  etc. All notices and other communications from the Company to
the  holder  of this  Warrant  shall be  mailed  by first  class  registered  or
certified mail,  postage prepaid,  at such address as may have been furnished to
the Company in writing by the Holder or,  until any the Holder  furnishes to the
Company an  address,  then to, and at the  address  of, the last  Holder of this
Warrant who has so furnished an address to the Company.

     15. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged  or terminated  only by an instrument in writing  signed by the party
against which  enforcement of such change,  waiver,  discharge or termination is
sought.  This Warrant  shall be construed  and enforced in  accordance  with and
governed by the internal  laws of the State of New York,  except where the Texas
Business  Corporation Act or other law applies. The headings in this Warrant are
for purposes of reference  only, and shall not limit or otherwise  affect any of
the terms hereof.  The invalidity or  unenforceability  of any provision  hereof
shall in no way affect the validity or enforceability of any other provision.


COMMON STOCK PURCHASE WARRANT NO. 1 - Page 8                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>

DATED as of October 14, 1997.


                                        TAKE-TWO INTERACTIVE SOFTWARE, INC.


                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------







COMMON STOCK PURCHASE WARRANT NO. 1 - Page 9                          Warrant 1
(Take-Two Interactive Software, Inc.)



<PAGE>

                                    EXHIBIT A

                      FORM OF NOTICE OF EXERCISE - WARRANT

                (To be executed only upon exercise or conversion
                       of the Warrant in whole or in part)

To Take-Two Interactive Software, Inc.

     The  undersigned  registered  holder  of the  accompanying  Warrant  hereby
exercises  such  Warrant or  portion  thereof  for,  and  purchases  thereunder,
_____________/1 shares of Common Stock (as defined in such Warrant) and herewith
makes payment  therefor in the amount and manner set forth below, as of the date
written below. The undersigned requests that the certificates for such shares of
Common  Stock  be  issued  in  the  name  of,  and  delivered  to,  ____________
_________________________________ whose address is _____________________________
____________________________________________________________.

          The Exercise Price is paid as follows:

          |_|  Bank draft payable to the Company in the amount of $__________.

          |_|  Wire  transfer  to the  account  of the  Company in the amount of
               $________.

          |_|  Delivery  of  ___________   previously   held  shares  having  an
               aggregate Market Value of $_________.

          |_|  Cashless  exercise.  Surrender of __________  shares  purchasable
               under this  Warrant for such shares of Common  Stock  issuable in
               exchange therefor pursuant to the Cashless Exercise provisions of
               the within Warrant, as provided in Section 1.1(iv) thereto.

     Upon  exercise  pursuant to this Notice of Exercise,  the holder will be in
compliance  with the  Limitation  on  Exercise  (as  defined  in the  Securities
Purchase Agreement pursuant to which this Warrant was issued).

Dated:  ____________________


                               _________________________________________________
                               (Name must conform to name of holder as specified
                               on the face of the Warrant)

                               By:______________________________________________
                                  Name:_________________________________________
                                  Title:________________________________________

Address of holder:

                               _________________________________________________

                               _________________________________________________

                               _________________________________________________


Date of exercise:___________________________

- --------
1    Insert  the number of shares of Common  Stock as to which the  accompanying
     Warrant  is being  exercised.  In the  case of a  partial  exercise,  a new
     Warrant  or  Warrants  will  be  issued  and  delivered,  representing  the
     unexercised portion of the accompanying Warrant, to the holder surrendering
     the same.




THIS COMMON STOCK PURCHASE  WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE  "SECURITIES  ACT"); OR UNDER ANY APPLICABLE LAW OR
REGULATION  OF ANY STATE.  THIS COMMON STOCK  WARRANT MAY NOT BE SOLD,  OFFERED,
ASSIGNED OR  TRANSFERRED  UNLESS THE WARRANT IS REGISTERED  UNDER THE SECURITIES
ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES, ASSIGNMENTS AND
TRANSFERS ARE MADE PURSUANT TO THE AVAILABLE  EXEMPTIONS  FROM THE  REGISTRATION
REQUIREMENTS OF THOSE LAWS. FURTHERMORE, THESE SECURITIES ARE SUBJECT TO CERTAIN
LIMITATIONS  ON EXERCISE,  AND THE SHARES OF COMMON STOCK RECEIVED UPON EXERCISE
ARE SUBJECT TO CERTAIN  LIMITATIONS  ON SALE,  IN EACH CASE AS DESCRIBED IN THAT
CERTAIN  SECURITIES  PURCHASE  AGREEMENT  DATED THE DATE HEREOF  (THE  "PURCHASE
AGREEMENT")  BETWEEN,  AMONG OTHERS,  THE COMPANY AND THE INITIAL HOLDER HEREOF.
THIS COMMON STOCK PURCHASE  WARRANT  CERTIFICATE  REFERS TO AND IS  SPECIFICALLY
GOVERNED BY CERTAIN PROVISIONS  CONTAINED IN THE PURCHASE  AGREEMENT,  A COPY OF
WHICH IS ON FILE WITH AND MAY BE  OBTAINED  FROM THE  COMPANY  AT ITS  PRINCIPAL
PLACE OF BUSINESS.

                       TAKE-TWO INTERACTIVE SOFTWARE, INC.

                          COMMON STOCK PURCHASE WARRANT

                                                         DATED: October 14, 1997

<TABLE>
- -----------------------------------------------------------------------------------------------

<S>                       <C>                           <C>               
                                                No.
 2   Infinity Emerging Opportunities Limited
Number of Common Shares:  57,500                Holder: 38 Hertford Street
Purchase Price:            $6.46                        London, England
Expiration Date:          October 14, 2002              WIY 7TG

     For identification only. The governing terms of this Warrant are set forth below.

- -----------------------------------------------------------------------------------------------
</TABLE>


     TAKE-TWO   INTERACTIVE   SOFTWARE,   INC.,  a  Delaware   corporation  (the
"Company"),  hereby  certifies  that,  for  value  received,  Infinity  Emerging
Opportunities Limited or its assigns (each a "Holder"), is entitled,  subject to
the terms set forth below, to purchase from the Company at any time or from time
to time  after the date  hereof  and prior to October  14,  2002 (the  "Exercise
Period"),  at the Purchase Price hereafter  defined,  Fifty-Seven  Thousand Five
Hundred  (57,500)  fully  paid and  nonassessable  shares  of  Common  Stock (as
hereinafter  defined) of the Company. The number and character of such shares of
Common  Stock and the  Purchase  Price are  subject to  adjustment  as  provided
herein.

     This Warrant (this  "Warrant";  such term to include any warrants issued in
substitution  therefor)  is one of a series of Common  Stock  Purchase  Warrants
issued in  connection  with that  certain  Securities  Purchase  Agreement  (the
"Purchase  Agreement")  dated of even date herewith between,  among others,  the
initial Holder hereof and the Company.


COMMON STOCK PURCHASE WARRANT NO. 2- Page 1                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>


     The purchase price per share of Common Stock issuable upon exercise of this
Warrant (the "Purchase Price") shall initially be $6.46; provided, however, that
the Purchase Price shall be adjusted from time to time as provided herein.

     As used herein the following terms,  unless the context otherwise requires,
have the following respective meanings:

          (a) The term "Company" shall include  Take-Two  Interactive  Software,
     Inc. and any entity that shall  succeed or assume the  obligations  of such
     corporation hereunder.

          (b) The term "Common Stock"  includes (a) the Company's  common stock,
     $.01 par  value per  share,  (b) any  other  capital  stock of any class or
     classes  (however  designated) of the Company,  authorized on or after such
     date, the holders of which shall have the right,  without  limitation as to
     amount, either to all or to a share of the balance of current dividends and
     liquidating  dividends after the payment of dividends and  distributions on
     any  shares  entitled  to  preference,  and  the  holders  of  which  shall
     ordinarily,  in the absence of  contingencies,  be entitled to vote for the
     election of a majority of directors  of the Company  (even though the right
     so to vote has been suspended by the happening of such a  contingency)  and
     (c) any other  securities  into  which or for  which any of the  securities
     described in (a) or (b) may be converted or exchanged pursuant to a plan of
     recapitalization, reorganization, merger, sale of assets or otherwise.

          (c) The term "Other Securities" refers to any stock (other than Common
     Stock) and other  securities of the Company or any other person  (corporate
     or otherwise) that the holder of this Warrant at any time shall be entitled
     to receive,  or shall have  received,  on the exercise of this Warrant,  in
     lieu of or in  addition  to  Common  Stock,  or that at any  time  shall be
     issuable  or shall have been issued in exchange  for or in  replacement  of
     Common Stock or Other Securities pursuant to Section 4 or otherwise.

          (d) The term "Market  Value" shall mean the average  closing  price of
     the Common Stock during the twenty (20)  trading  days  preceding  (but not
     excluding)  the  Exercise  Date  as  reported  on any  national  securities
     exchange or  automated  quotation  system on which the Common Stock is then
     traded (as reported by Bloomberg L.P.).

     1. Exercise of Warrant.


          1.1. Method of Exercise.  This Warrant may be exercised in whole or in
     part (but not as to a fractional  share of Common  Stock),  at any time and
     from  time to time  during  the  Exercise  Period by the  Holder  hereof by
     delivery of a notice of exercise (a "Notice of Exercise")  substantially in
     the form  attached  hereto  as  Exhibit  A via  facsimile  to the  Company.
     Promptly  thereafter the Holder shall surrender this Warrant to the


COMMON STOCK PURCHASE WARRANT NO. 2- Page 2                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>

     Company at its  principal  office,  accompanied  by payment of the Purchase
     Price  multiplied  by the  number of shares of Common  Stock for which this
     Warrant is being exercised (the "Exercise Price").  Payment of the Exercise
     Price  shall be made,  at the  option of the  Holder,  (i) by check or bank
     draft  payable to the order of the  Company,  (ii) by wire  transfer to the
     account of the  Company,  (iii) in shares of Common  Stock  having a Market
     Value on the Exercise Date (as hereinafter  defined) equal to the aggregate
     Exercise Price or (iv) by presentation and surrender of this Warrant to the
     Company for cashless exercise (a "Cashless Exercise"),  with such surrender
     being deemed a waiver of the Holder's  obligation to pay all or any portion
     of the Exercise Price.  In the event the Holder elects a Cashless  Exercise
     (which such election shall be  irrevocable)  the Holder shall exchange this
     Warrant for that number of shares of Common Stock determined by multiplying
     the  number  of shares of  Common  Stock as to which the  Warrant  is being
     exercised by a fraction,  the  numerator  of which shall be the  difference
     between the then current Market Value of the issued and outstanding  Common
     Stock and the Purchase  Price,  and the  denominator  of which shall be the
     then current Market Value of the issued and  outstanding  Common Stock.  If
     the amount of the payment received by the Company is less than the Exercise
     Price, the Holder will be notified of the deficiency and shall make payment
     in that amount  within  five (5)  business  days.  In the event the payment
     exceeds the Exercise Price,  the Company will promptly refund the excess to
     the  Holder.  Upon  exercise,  the Holder  shall be  entitled  to  receive,
     promptly  after payment in full,  one or more  certificates,  issued in the
     Holder's name or in such name or names as the Holder may direct, subject to
     the limitations on transfer  contained herein,  for the number of shares of
     Common Stock so  purchased.  The shares so purchased  shall be deemed to be
     issued as of the close of business  on the date on which the Company  shall
     have  received from the Holder  payment in full of the Exercise  Price (the
     "Exercise Date").


          1.2.  Regulation D  Restrictions.  The Holder  hereof  represents  and
     warrants to the Company that it has acquired  this Warrant and  anticipates
     acquiring the shares of Common Stock  issuable upon exercise of the Warrant
     solely for its own account for  investment  purposes and not with a view to
     or for resale of such  securities  unless such  resale has been  registered
     with the Securities and Exchange  Commission or an applicable  exemption is
     available therefor. At the time this Warrant is exercised,  the Company may
     require the Holder to state in the Notice of Exercise such  representations
     concerning the Holder as are necessary or appropriate to assure  compliance
     by the Holder with the Securities Act.


          1.3.  Company  Acknowledgment.  The Company  will,  at the time of the
     exercise  of  this  Warrant,   upon  the  request  of  the  Holder  hereof,
     acknowledge  in writing its  continuing  obligation to afford to the Holder
     any rights to which the Holder  shall  continue to be  entitled  after such
     exercise in accordance  with the provisions of this Warrant.  If the Holder
     shall  fail to make any such  request,  such  failure  shall not affect the
     continuing  obligation  of the  Company  to afford to the  Holder  any such
     rights.


COMMON STOCK PURCHASE WARRANT NO. 2- Page 3                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>

          1.4. Limitation on Exercise.  Notwithstanding the rights of the Holder
     to exercise  all or a portion of this  Warrant as  described  herein,  such
     exercise  rights  shall be  limited  solely in the  manner set forth in the
     Purchase  Agreement  as if such  provisions  were  specifically  set  forth
     herein.

2. Delivery of Stock  Certificates,  etc., on Exercise.  As soon as  practicable
after the  exercise of this  Warrant,  and in any event  within the time periods
specified in the Purchase  Agreement,  the Company at its expense (including the
payment by it of any applicable issue,  stamp or transfer taxes upon issuance to
the Holder)  will cause to be issued in the name of and  delivered to the Holder
thereof,  or, to the extent permissible  hereunder,  to such other person as the
Holder may direct,  a certificate or  certificates  for the number of fully paid
and  nonassessable  shares of Common  Stock (or Other  Securities)  to which the
Holder shall be entitled on such exercise, plus, in lieu of any fractional share
to which the Holder would  otherwise be  entitled,  cash equal to such  fraction
multiplied by the then applicable Purchase Price,  together with any other stock
or other securities and property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise.

3.  Adjustment for  Extraordinary  Events.  The Purchase Price to be paid by the
Holder upon  exercise of this  Warrant  shall be adjusted in case at any time or
from time to time the Company  should (i)  subdivide the  outstanding  shares of
Common Stock into a greater number of shares,  (ii)  consolidate the outstanding
shares of Common  Stock into a smaller  number of shares,  (iii) issue shares of
Common Stock or securities convertible into or exchangeable for shares of Common
Stock as a  dividend  to all or  substantially  all  holders of shares of Common
Stock or (iv) issue by reclassification of shares of Common Stock, any shares of
capital  stock of the  Company,  in each  event  pursuant  to  Article  X of the
Purchase Agreement as if such provisions were specifically set forth herein.

4. Exercise Price Reset.

          4.1  Adjustment  to  Purchase  Price if  Additional  Grant  Shares are
     Issued.  If the Company is obligated to issue any  Additional  Grant Shares
     (as  defined  in the  Purchase  Agreement),  the  Purchase  Price  shall be
     adjusted so that this Warrant  will have a "value"  equal to the "value" of
     this  Warrant as of its  original  date of issue.  For the purposes of this
     Section  4, the term  "value"  shall  mean a good  faith  valuation  of the
     theoretical trade price of this Warrant,  prepared by HW Partners, L.P. (or
     such other entity as  designated by the Holder)  using a  Black-Scholes  or
     similar  model and using as the  "market  price"  for such model the market
     Price (as defined in the Purchase  Agreement)  used to determine the number
     of Additional Grant Shares.

          4.2 Notice of Warrant Value.  Within seven (7) business days after the
     Closing  Date (as such  term is  defined  in the  Purchase  Agreement),  HW
     Partners,  L.P.  will deliver to the Company a  certificate  describing  in
     reasonable  detail the  calculation  of the value of this  Warrant.  Within
     seven (7)  business  days after the date on which the number of  Additional
     Grant Shares is calculated (if any), HW Partners,  L.P. will deliver to the


COMMON STOCK PURCHASE WARRANT NO. 2- Page 4                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>

     Company a certificate  indicating in reasonable detail, (1) its calculation
     of the value of this Warrant as of such date and (2) its  determination  of
     the new  Purchase  Price for this  Warrant as of such date.  If there is no
     dispute as to the adjustment to the Purchase Price, the Company shall cause
     its  auditors  to deliver a notice of  adjustment  pursuant to Section 9 of
     this  Warrant as promptly  as  practicable  (but  within ten (10)  business
     days.).

          4.3  Dispute  as to  Warrant  Value.  In the  event  that the  Company
     disputes any  calculation of Warrant value under this Section 4, the matter
     shall  be  referred   to  an   Independent   Financial   Expert  for  final
     determination; provided that the Company notifies HW Partners, L.P. of such
     dispute within five (5) business days of written receipt of any certificate
     of  Warrant  value.  For  purposes  of this  Section  4.3,  an  Independent
     Financial Expert shall mean a nationally recognized investment banking firm
     (i)  which  does not (and  whose  directors,  officers  and  employees  and
     affiliates do not), have a direct or indirect  financial interest in either
     the  Company  or any  holder  of  this  Warrant  (other  than a  beneficial
     ownership,  directly  or  indirectly,  of  less  than  one  percent  of the
     outstanding  shares of capital  stock of the  Company),  (ii) which has not
     been,  and,  at the time it is called  upon to give  independent  financial
     services to the  Company,  is not (and none of whose  directors,  officers,
     employees or affiliates is) a promoter,  director or officer of the Company
     or any of its  affiliates  or an  underwriter  with  respect  to any of the
     Company's  securities,  (iii) which does not provide any advice or opinions
     to the Company or any Warrant  holder  except as an  Independent  Financial
     Expert and (iv) which is mutually  agreeable to the Company and the holders
     of a majority of the Warrants. If the Company and the holders of a majority
     of the  Warrants  do not  promptly  agree as to the  Independent  Financial
     Expert, each shall appoint one investment banking firm and the two firms so
     appointed shall select the Independent  financial  Expert to be employed by
     the Company.  An Independent  Financial  Expert shall be compensated by the
     Company for  opinions or services it provides as an  Independent  Financial
     Expert.  In making  its  determination  of the value of this  Warrant,  the
     Independent  Financial Expert shall use one or more valuation  methods that
     the Independent Financial Expert, in its professional judgment,  determines
     to be most appropriate. After the Independent Financial Expert has made its
     determination,  the Company shall cause the Independent Financial Expert to
     prepare  a report (a "Value  Report")  stating  the  methods  of  valuation
     considered or used and the value of the Warrant or other security it values
     and  containing a statement  as to the nature and scope of the  examination
     made.  Such Value Report shall  accompany any notice of adjustment  sent by
     the Company to the Holder  pursuant  to this  Warrant;  provided,  that the
     adjustment  to the  Exercise  Price  that is the  subject  of  such  notice
     requires the services of any Independent Financial Expert.

     5. No Impairment.  The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization,  transfer of assets, consolidation,
merger, dissolution,  issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant,  but will at all times in good faith  assist in the carrying out of all
such  terms  and in the  taking  of  all  such  action  as may be


COMMON STOCK PURCHASE WARRANT NO. 2- Page 5                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>

necessary  or  appropriate  in order to protect the rights of the Holder of this
Warrant against  impairment.  Without  limiting the generality of the foregoing,
the  Company  (a)  will  not  increase  the par  value  of any  shares  of stock
receivable on the exercise of this Warrant above the amount payable  therefor on
such exercise,  (b) will take all such action as may be necessary or appropriate
in  order  that the  Company  may  validly  and  legally  issue  fully  paid and
nonassessable  shares of stock on the  exercise of this Warrant and (c) will not
transfer  all or  substantially  all of its  properties  and assets to any other
person  (corporate or otherwise),  or  consolidate  with or merge into any other
person or permit any such person to  consolidate  with or merge into the Company
(if the Company is not the  surviving  person),  unless such other  person shall
expressly assume in writing and will be bound by all the terms of this Warrant.

     6.  Accountants'  Certificate  as to  Adjustments.  In  each  case  of  any
adjustment or readjustment  in the shares of Common Stock (or Other  Securities)
or the Purchase Price  issuable on the exercise of this Warrant,  the Company at
its expense will cause  independent  certified  public  accountants  of national
standing  selected  by the  Company  (which may be the  Company's  auditors)  to
compute such  adjustment or  readjustment  in accordance  with the terms of this
Warrant and prepare a certificate  setting forth such adjustment or readjustment
and showing in detail the facts upon which such  adjustment or  readjustment  is
based,  including a statement of (a) the consideration received or receivable by
the  Company for any  additional  shares of Common  Stock (or Other  Securities)
issued or sold or deemed to have been  issued or sold,  (b) the number of shares
of Common Stock (or Other  Securities)  outstanding  or deemed to be outstanding
and (c) the  Purchase  Price and the  number  of  shares  of Common  Stock to be
received  upon  exercise of this Warrant,  in effect  immediately  prior to such
issue or sale and as adjusted and  readjusted as provided in this  Warrant.  The
Company will  forthwith  mail a copy of each such  certificate  to the Holder of
this Warrant, and will, on the written request at any time of the Holder of this
Warrant,  furnish to the Holder a like  certificate  setting  forth the Purchase
Price at the time in effect and showing how it was calculated.

     7. Notices of Record Date, etc. In the event of

          (a) any taking by the  Company of a record of the holders of any class
     of securities  for the purpose of determining  the holders  thereof who are
     entitled to receive any  dividend  or other  distribution,  or any right to
     subscribe  for,  purchase or  otherwise  acquire any shares of stock of any
     class or any other  securities or property,  or to receive any other right,
     or

          (b) any capital reorganization of the Company, any reclassification or
     recapitalization of the capital stock of the Company or any transfer of all
     or  substantially  all the assets of the  Company to, or  consolidation  or
     merger of the Company with or into, any other person, or

          (c)  any  voluntary  or   involuntary   dissolution,   liquidation  or
     winding-up of the Company,


COMMON STOCK PURCHASE WARRANT NO. 2- Page 6                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>

then, and in each such event, the Company will mail or cause to be mailed to the
Holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the  purpose of such  dividend,  distribution  or right,  and
stating the amount and character of such dividend,  distribution  or right,  and
(ii)   the   date  on   which   any   such   reorganization,   reclassification,
recapitalization,  transfer, consolidation,  merger, dissolution, liquidation or
winding-up  is to take place,  and the time,  if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other  Securities)  for  securities or other property
deliverable   on  such   reorganization,   reclassification,   recapitalization,
transfer,  consolidation,  merger, dissolution,  liquidation or winding-up. Such
notice  shall be mailed  at least 20 days  prior to the date  specified  in such
notice on which any action is to be taken.

     8. Reservation of Stock, etc. Issuable on Exercise of Warrant.  The Company
will at all times reserve and keep  available,  solely for issuance and delivery
on the  exercise  of  this  Warrant,  all  shares  of  Common  Stock  (or  Other
Securities) from time to time issuable on the exercise of this Warrant.

     9. Exchange of Warrant. On surrender for exchange of this Warrant, properly
endorsed,  to the Company,  the Company at its expense will issue and deliver to
or on the order of the holder  thereof a new Warrant of like tenor,  in the name
of such Holder or as such  Holder (on  payment by such holder of any  applicable
transfer  taxes)  may  direct,  calling  in the  aggregate  on the face or faces
thereof for the number of shares of Common  Stock  called for on the face of the
Warrant so surrendered.

     10. Replacement of Warrant. On receipt of evidence reasonably  satisfactory
to the Company of the loss,  theft,  destruction  or  mutilation of this Warrant
and, in the case of any such loss,  theft or  destruction  of this  Warrant,  on
delivery of an indemnity agreement or security  reasonably  satisfactory in form
and amount to the Company or, in the case of any such  mutilation,  on surrender
and  cancellation  of this Warrant,  the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.

     11. Remedies. The Company stipulates that the remedies at law of the Holder
of this Warrant in the event of any default by the Company in the performance of
or  compliance  with any of the  terms of this  Warrant  are not and will not be
adequate,  and that such terms may be specifically  enforced by a decree for the
specific  performance  of any  agreement  contained  herein or by an  injunction
against a violation of any of the terms hereof or otherwise.

     12. Negotiability, etc. This Warrant is issued upon the following terms, to
all of which each  Holder or owner  hereof by the  taking  hereof  consents  and
agrees:

          (a) title to this Warrant may be transferred  by  endorsement  (by the
     Holder  hereof  executing  the form of  assignment  at the end  hereof) and
     delivery  in the  same  manner  as in the case of a  negotiable  instrument
     transferable by endorsement and delivery;



COMMON STOCK PURCHASE WARRANT NO. 2- Page 7                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>

          (b) any person in  possession  of this  Warrant  properly  endorsed is
     authorized to represent  himself as absolute  owner hereof and is empowered
     to transfer  absolute title hereto by endorsement  and delivery hereof to a
     bona fide purchaser hereof for value;  each prior taker or owner waives and
     renounces  all of his  equities or rights in this  Warrant in favor of each
     such bona fide  purchaser,  and each such bona fide purchaser shall acquire
     absolute title hereto and to all rights represented hereby;

          (c) until this Warrant is transferred on the books of the Company, the
     Company may treat the registered Holder hereof as the absolute owner hereof
     for all purposes, notwithstanding any notice to the contrary; and

          (d)  notwithstanding  the  foregoing,  this  Warrant  may not be sold,
     transferred  or  assigned  except  pursuant  to an  effective  registration
     statement  under the  Securities  Act of 1933, as amended (the "Act"),  or,
     pursuant to an applicable exemption therefrom (including in accordance with
     Regulation D promulgated under the Act).

     13. Registration Rights. The Company is obligated to register the shares of
Common Stock issuable upon exercise of this Warrant in accordance with the terms
of a Registration  Rights Agreement between the Company and the Holder dated the
date hereof.

     14. Notices,  etc. All notices and other communications from the Company to
the  holder  of this  Warrant  shall be  mailed  by first  class  registered  or
certified mail,  postage prepaid,  at such address as may have been furnished to
the Company in writing by the Holder or,  until any the Holder  furnishes to the
Company an  address,  then to, and at the  address  of, the last  Holder of this
Warrant who has so furnished an address to the Company.

     15. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged  or terminated  only by an instrument in writing  signed by the party
against which  enforcement of such change,  waiver,  discharge or termination is
sought.  This Warrant  shall be construed  and enforced in  accordance  with and
governed by the internal  laws of the State of New York,  except where the Texas
Business  Corporation Act or other law applies. The headings in this Warrant are
for purposes of reference  only, and shall not limit or otherwise  affect any of
the terms hereof.  The invalidity or  unenforceability  of any provision  hereof
shall in no way affect the validity or enforceability of any other provision.



COMMON STOCK PURCHASE WARRANT NO. 2- Page 8                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>

DATED as of October 14, 1997.


                                        TAKE-TWO INTERACTIVE SOFTWARE, INC.


                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------




COMMON STOCK PURCHASE WARRANT NO. 2- Page 9                            Warrant 2
(Take-Two Interactive Software, Inc.)



<PAGE>

                                    EXHIBIT A

                      FORM OF NOTICE OF EXERCISE - WARRANT

                (To be executed only upon exercise or conversion
                       of the Warrant in whole or in part)

To Take-Two Interactive Software, Inc.

     The  undersigned  registered  holder  of the  accompanying  Warrant  hereby
exercises  such  Warrant or  portion  thereof  for,  and  purchases  thereunder,
_____________/1 shares of Common Stock (as defined in such Warrant) and herewith
makes payment  therefor in the amount and manner set forth below, as of the date
written below. The undersigned requests that the certificates for such shares of
Common Stock be issued in the name of, and delivered to, _______________________
_________________________________ whose address is _____________________________
________________________________________________.

          The Exercise Price is paid as follows:

          |_|  Bank draft payable to the Company in the amount of $__________.

          |_|  Wire  transfer  to the  account  of the  Company in the amount of
               $________.

          |_|  Delivery  of  ___________   previously   held  shares  having  an
               aggregate Market Value of $_________.

          |_|  Cashless  exercise.  Surrender of __________  shares  purchasable
               under this  Warrant for such shares of Common  Stock  issuable in
               exchange therefor pursuant to the Cashless Exercise provisions of
               the within Warrant, as provided in Section 1.1(iv) thereto.

     Upon  exercise  pursuant to this Notice of Exercise,  the holder will be in
compliance  with the  Limitation  on  Exercise  (as  defined  in the  Securities
Purchase Agreement pursuant to which this Warrant was issued).

Dated:  ____________________

                               _________________________________________________
                               (Name must conform to name of holder as specified
                               on the face of the Warrant)

                               By:______________________________________________
                                  Name:_________________________________________
                                  Title:________________________________________

Address of holder:

                               _________________________________________________

                               _________________________________________________

                               _________________________________________________


Date of exercise:___________________________

- --------
1    Insert  the number of shares of Common  Stock as to which the  accompanying
     Warrant  is being  exercised.  In the  case of a  partial  exercise,  a new
     Warrant  or  Warrants  will  be  issued  and  delivered,  representing  the
     unexercised portion of the accompanying Warrant, to the holder surrendering
     the same.



THIS COMMON STOCK PURCHASE  WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE  "SECURITIES  ACT"); OR UNDER ANY APPLICABLE LAW OR
REGULATION  OF ANY STATE.  THIS COMMON STOCK  WARRANT MAY NOT BE SOLD,  OFFERED,
ASSIGNED OR  TRANSFERRED  UNLESS THE WARRANT IS REGISTERED  UNDER THE SECURITIES
ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES, ASSIGNMENTS AND
TRANSFERS ARE MADE PURSUANT TO THE AVAILABLE  EXEMPTIONS  FROM THE  REGISTRATION
REQUIREMENTS OF THOSE LAWS. FURTHERMORE, THESE SECURITIES ARE SUBJECT TO CERTAIN
LIMITATIONS  ON EXERCISE,  AND THE SHARES OF COMMON STOCK RECEIVED UPON EXERCISE
ARE SUBJECT TO CERTAIN  LIMITATIONS  ON SALE,  IN EACH CASE AS DESCRIBED IN THAT
CERTAIN  SECURITIES  PURCHASE  AGREEMENT  DATED THE DATE HEREOF  (THE  "PURCHASE
AGREEMENT")  BETWEEN,  AMONG OTHERS,  THE COMPANY AND THE INITIAL HOLDER HEREOF.
THIS COMMON STOCK PURCHASE  WARRANT  CERTIFICATE  REFERS TO AND IS  SPECIFICALLY
GOVERNED BY CERTAIN PROVISIONS  CONTAINED IN THE PURCHASE  AGREEMENT,  A COPY OF
WHICH IS ON FILE WITH AND MAY BE  OBTAINED  FROM THE  COMPANY  AT ITS  PRINCIPAL
PLACE OF BUSINESS.

                       TAKE-TWO INTERACTIVE SOFTWARE, INC.

                          COMMON STOCK PURCHASE WARRANT

                                                         DATED: October 14, 1997

- --------------------------------------------------------------------------------

                                                 No. 3   Glacier
 Capital Limited
Number of Common Shares: 57,500                  Holder: 38 Hertford Street
Purchase Price:           $6.46                          London, England
Expiration Date:         October 14, 2002                WIY 7TG

                            For identification only.
            The governing terms of this Warrant are set forth below.

- --------------------------------------------------------------------------------

     TAKE-TWO   INTERACTIVE   SOFTWARE,   INC.,  a  Delaware   corporation  (the
"Company"),  hereby certifies that, for value received,  Glacier Capital Limited
or its assigns  (each a "Holder"),  is entitled,  subject to the terms set forth
below,  to purchase  from the Company at any time or from time to time after the
date  hereof and prior to  October  14,  2002 (the  "Exercise  Period"),  at the
Purchase Price hereafter  defined,  Fifty-Seven  Thousand Five Hundred  (57,500)
fully paid and nonassessable  shares of Common Stock (as hereinafter defined) of
the  Company.  The number and  character  of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided herein.

     This Warrant (this  "Warrant";  such term to include any warrants issued in
substitution  therefor)  is one of a series of Common  Stock  Purchase  Warrants
issued in  connection  with that  certain  Securities  Purchase  Agreement  (the
"Purchase  Agreement")  dated of even date herewith between,  among others,  the
initial Holder hereof and the Company.


COMMON STOCK PURCHASE WARRANT NO. 3- Page 1                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>


     The purchase price per share of Common Stock issuable upon exercise of this
Warrant (the "Purchase Price") shall initially be $6.46; provided, however, that
the Purchase Price shall be adjusted from time to time as provided herein.

     As used herein the following terms,  unless the context otherwise requires,
have the following respective meanings:

          (a) The term "Company" shall include  Take-Two  Interactive  Software,
     Inc. and any entity that shall  succeed or assume the  obligations  of such
     corporation hereunder.

          (b) The term "Common Stock"  includes (a) the Company's  common stock,
     $.01 par  value per  share,  (b) any  other  capital  stock of any class or
     classes  (however  designated) of the Company,  authorized on or after such
     date, the holders of which shall have the right,  without  limitation as to
     amount, either to all or to a share of the balance of current dividends and
     liquidating  dividends after the payment of dividends and  distributions on
     any  shares  entitled  to  preference,  and  the  holders  of  which  shall
     ordinarily,  in the absence of  contingencies,  be entitled to vote for the
     election of a majority of directors  of the Company  (even though the right
     so to vote has been suspended by the happening of such a  contingency)  and
     (c) any other  securities  into  which or for  which any of the  securities
     described in (a) or (b) may be converted or exchanged pursuant to a plan of
     recapitalization, reorganization, merger, sale of assets or otherwise.

          (c) The term "Other Securities" refers to any stock (other than Common
     Stock) and other  securities of the Company or any other person  (corporate
     or otherwise) that the holder of this Warrant at any time shall be entitled
     to receive,  or shall have  received,  on the exercise of this Warrant,  in
     lieu of or in  addition  to  Common  Stock,  or that at any  time  shall be
     issuable  or shall have been issued in exchange  for or in  replacement  of
     Common Stock or Other Securities pursuant to Section 4 or otherwise.

          (d) The term "Market  Value" shall mean the average  closing  price of
     the Common Stock during the twenty (20)  trading  days  preceding  (but not
     excluding)  the  Exercise  Date  as  reported  on any  national  securities
     exchange or  automated  quotation  system on which the Common Stock is then
     traded (as reported by Bloomberg L.P.).

     1. Exercise of Warrant.

          1.1. Method of Exercise.  This Warrant may be exercised in whole or in
     part (but not as to a fractional  share of Common  Stock),  at any time and
     from  time to time  during  the  Exercise  Period by the  Holder  hereof by
     delivery of a notice of exercise (a "Notice of Exercise")  substantially in
     the form  attached  hereto  as  Exhibit  A via  facsimile  to the  Company.
     Promptly  thereafter the Holder shall surrender this Warrant to the


COMMON STOCK PURCHASE WARRANT NO. 3- Page 2                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>

     Company at its  principal  office,  accompanied  by payment of the Purchase
     Price  multiplied  by the  number of shares of Common  Stock for which this
     Warrant is being exercised (the "Exercise Price").  Payment of the Exercise
     Price  shall be made,  at the  option of the  Holder,  (i) by check or bank
     draft  payable to the order of the  Company,  (ii) by wire  transfer to the
     account of the  Company,  (iii) in shares of Common  Stock  having a Market
     Value on the Exercise Date (as hereinafter  defined) equal to the aggregate
     Exercise Price or (iv) by presentation and surrender of this Warrant to the
     Company for cashless exercise (a "Cashless Exercise"),  with such surrender
     being deemed a waiver of the Holder's  obligation to pay all or any portion
     of the Exercise Price.  In the event the Holder elects a Cashless  Exercise
     (which such election shall be  irrevocable)  the Holder shall exchange this
     Warrant for that number of shares of Common Stock determined by multiplying
     the  number  of shares of  Common  Stock as to which the  Warrant  is being
     exercised by a fraction,  the  numerator  of which shall be the  difference
     between the then current Market Value of the issued and outstanding  Common
     Stock and the Purchase  Price,  and the  denominator  of which shall be the
     then current Market Value of the issued and  outstanding  Common Stock.  If
     the amount of the payment received by the Company is less than the Exercise
     Price, the Holder will be notified of the deficiency and shall make payment
     in that amount  within  five (5)  business  days.  In the event the payment
     exceeds the Exercise Price,  the Company will promptly refund the excess to
     the  Holder.  Upon  exercise,  the Holder  shall be  entitled  to  receive,
     promptly  after payment in full,  one or more  certificates,  issued in the
     Holder's name or in such name or names as the Holder may direct, subject to
     the limitations on transfer  contained herein,  for the number of shares of
     Common Stock so  purchased.  The shares so purchased  shall be deemed to be
     issued as of the close of business  on the date on which the Company  shall
     have  received from the Holder  payment in full of the Exercise  Price (the
     "Exercise Date").

          1.2.  Regulation D  Restrictions.  The Holder  hereof  represents  and
     warrants to the Company that it has acquired  this Warrant and  anticipates
     acquiring the shares of Common Stock  issuable upon exercise of the Warrant
     solely for its own account for  investment  purposes and not with a view to
     or for resale of such  securities  unless such  resale has been  registered
     with the Securities and Exchange  Commission or an applicable  exemption is
     available therefor. At the time this Warrant is exercised,  the Company may
     require the Holder to state in the Notice of Exercise such  representations
     concerning the Holder as are necessary or appropriate to assure  compliance
     by the Holder with the Securities Act.

          1.3.  Company  Acknowledgment.  The Company  will,  at the time of the
     exercise  of  this  Warrant,   upon  the  request  of  the  Holder  hereof,
     acknowledge  in writing its  continuing  obligation to afford to the Holder
     any rights to which the Holder  shall  continue to be  entitled  after such
     exercise in accordance  with the provisions of this Warrant.  If the Holder
     shall  fail to make any such  request,  such  failure  shall not affect the
     continuing  obligation  of the  Company  to afford to the  Holder  any such
     rights.


COMMON STOCK PURCHASE WARRANT NO. 3- Page 3                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>

          1.4. Limitation on Exercise.  Notwithstanding the rights of the Holder
     to exercise  all or a portion of this  Warrant as  described  herein,  such
     exercise  rights  shall be  limited  solely in the  manner set forth in the
     Purchase  Agreement  as if such  provisions  were  specifically  set  forth
     herein.

2. Delivery of Stock  Certificates,  etc., on Exercise.  As soon as  practicable
after the  exercise of this  Warrant,  and in any event  within the time periods
specified in the Purchase  Agreement,  the Company at its expense (including the
payment by it of any applicable issue,  stamp or transfer taxes upon issuance to
the Holder)  will cause to be issued in the name of and  delivered to the Holder
thereof,  or, to the extent permissible  hereunder,  to such other person as the
Holder may direct,  a certificate or  certificates  for the number of fully paid
and  nonassessable  shares of Common  Stock (or Other  Securities)  to which the
Holder shall be entitled on such exercise, plus, in lieu of any fractional share
to which the Holder would  otherwise be  entitled,  cash equal to such  fraction
multiplied by the then applicable Purchase Price,  together with any other stock
or other securities and property (including cash, where applicable) to which the
Holder is entitled upon such exercise pursuant to Section 1 or otherwise.

3.  Adjustment for  Extraordinary  Events.  The Purchase Price to be paid by the
Holder upon  exercise of this  Warrant  shall be adjusted in case at any time or
from time to time the Company  should (i)  subdivide the  outstanding  shares of
Common Stock into a greater number of shares,  (ii)  consolidate the outstanding
shares of Common  Stock into a smaller  number of shares,  (iii) issue shares of
Common Stock or securities convertible into or exchangeable for shares of Common
Stock as a  dividend  to all or  substantially  all  holders of shares of Common
Stock or (iv) issue by reclassification of shares of Common Stock, any shares of
capital  stock of the  Company,  in each  event  pursuant  to  Article  X of the
Purchase Agreement as if such provisions were specifically set forth herein.

4. Exercise Price Reset.

          4.1  Adjustment  to  Purchase  Price if  Additional  Grant  Shares are
     Issued.  If the Company is obligated to issue any  Additional  Grant Shares
     (as  defined  in the  Purchase  Agreement),  the  Purchase  Price  shall be
     adjusted so that this Warrant  will have a "value"  equal to the "value" of
     this  Warrant as of its  original  date of issue.  For the purposes of this
     Section  4, the term  "value"  shall  mean a good  faith  valuation  of the
     theoretical trade price of this Warrant,  prepared by HW Partners, L.P. (or
     such other entity as  designated by the Holder)  using a  Black-Scholes  or
     similar  model and using as the  "market  price"  for such model the market
     Price (as defined in the Purchase  Agreement)  used to determine the number
     of Additional Grant Shares.

          4.2 Notice of Warrant Value.  Within seven (7) business days after the
     Closing  Date (as such  term is  defined  in the  Purchase  Agreement),  HW
     Partners,  L.P.  will deliver to the Company a  certificate  describing  in
     reasonable  detail the  calculation  of the value of this  Warrant.  Within
     seven (7)  business  days after the date on which the number of  Additional
     Grant Shares is calculated (if any), HW Partners,  L.P. will deliver to the


COMMON STOCK PURCHASE WARRANT NO. 3- Page 4                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>

     Company a certificate  indicating in reasonable detail, (1) its calculation
     of the value of this Warrant as of such date and (2) its  determination  of
     the new  Purchase  Price for this  Warrant as of such date.  If there is no
     dispute as to the adjustment to the Purchase Price, the Company shall cause
     its  auditors  to deliver a notice of  adjustment  pursuant to Section 9 of
     this  Warrant as promptly  as  practicable  (but  within ten (10)  business
     days.).

          4.3  Dispute  as to  Warrant  Value.  In the  event  that the  Company
     disputes any  calculation of Warrant value under this Section 4, the matter
     shall  be  referred   to  an   Independent   Financial   Expert  for  final
     determination; provided that the Company notifies HW Partners, L.P. of such
     dispute within five (5) business days of written receipt of any certificate
     of  Warrant  value.  For  purposes  of this  Section  4.3,  an  Independent
     Financial Expert shall mean a nationally recognized investment banking firm
     (i)  which  does not (and  whose  directors,  officers  and  employees  and
     affiliates do not), have a direct or indirect  financial interest in either
     the  Company  or any  holder  of  this  Warrant  (other  than a  beneficial
     ownership,  directly  or  indirectly,  of  less  than  one  percent  of the
     outstanding  shares of capital  stock of the  Company),  (ii) which has not
     been,  and,  at the time it is called  upon to give  independent  financial
     services to the  Company,  is not (and none of whose  directors,  officers,
     employees or affiliates is) a promoter,  director or officer of the Company
     or any of its  affiliates  or an  underwriter  with  respect  to any of the
     Company's  securities,  (iii) which does not provide any advice or opinions
     to the Company or any Warrant  holder  except as an  Independent  Financial
     Expert and (iv) which is mutually  agreeable to the Company and the holders
     of a majority of the Warrants. If the Company and the holders of a majority
     of the  Warrants  do not  promptly  agree as to the  Independent  Financial
     Expert, each shall appoint one investment banking firm and the two firms so
     appointed shall select the Independent  financial  Expert to be employed by
     the Company.  An Independent  Financial  Expert shall be compensated by the
     Company for  opinions or services it provides as an  Independent  Financial
     Expert.  In making  its  determination  of the value of this  Warrant,  the
     Independent  Financial Expert shall use one or more valuation  methods that
     the Independent Financial Expert, in its professional judgment,  determines
     to be most appropriate. After the Independent Financial Expert has made its
     determination,  the Company shall cause the Independent Financial Expert to
     prepare  a report (a "Value  Report")  stating  the  methods  of  valuation
     considered or used and the value of the Warrant or other security it values
     and  containing a statement  as to the nature and scope of the  examination
     made.  Such Value Report shall  accompany any notice of adjustment  sent by
     the Company to the Holder  pursuant  to this  Warrant;  provided,  that the
     adjustment  to the  Exercise  Price  that is the  subject  of  such  notice
     requires the services of any Independent Financial Expert.

     5. No Impairment.  The Company will not, by amendment of its Certificate of
Incorporation or through any reorganization,  transfer of assets, consolidation,
merger, dissolution,  issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant,  but will at all times in good faith  assist in the carrying out of all
such  terms  and in the  taking  of  all  such  action  as may be


COMMON STOCK PURCHASE WARRANT NO. 3- Page 5                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>

necessary  or  appropriate  in order to protect the rights of the Holder of this
Warrant against  impairment.  Without  limiting the generality of the foregoing,
the  Company  (a)  will  not  increase  the par  value  of any  shares  of stock
receivable on the exercise of this Warrant above the amount payable  therefor on
such exercise,  (b) will take all such action as may be necessary or appropriate
in  order  that the  Company  may  validly  and  legally  issue  fully  paid and
nonassessable  shares of stock on the  exercise of this Warrant and (c) will not
transfer  all or  substantially  all of its  properties  and assets to any other
person  (corporate or otherwise),  or  consolidate  with or merge into any other
person or permit any such person to  consolidate  with or merge into the Company
(if the Company is not the  surviving  person),  unless such other  person shall
expressly assume in writing and will be bound by all the terms of this Warrant.

     6.  Accountants'  Certificate  as to  Adjustments.  In  each  case  of  any
adjustment or readjustment  in the shares of Common Stock (or Other  Securities)
or the Purchase Price  issuable on the exercise of this Warrant,  the Company at
its expense will cause  independent  certified  public  accountants  of national
standing  selected  by the  Company  (which may be the  Company's  auditors)  to
compute such  adjustment or  readjustment  in accordance  with the terms of this
Warrant and prepare a certificate  setting forth such adjustment or readjustment
and showing in detail the facts upon which such  adjustment or  readjustment  is
based,  including a statement of (a) the consideration received or receivable by
the  Company for any  additional  shares of Common  Stock (or Other  Securities)
issued or sold or deemed to have been  issued or sold,  (b) the number of shares
of Common Stock (or Other  Securities)  outstanding  or deemed to be outstanding
and (c) the  Purchase  Price and the  number  of  shares  of Common  Stock to be
received  upon  exercise of this Warrant,  in effect  immediately  prior to such
issue or sale and as adjusted and  readjusted as provided in this  Warrant.  The
Company will  forthwith  mail a copy of each such  certificate  to the Holder of
this Warrant, and will, on the written request at any time of the Holder of this
Warrant,  furnish to the Holder a like  certificate  setting  forth the Purchase
Price at the time in effect and showing how it was calculated.

     7. Notices of Record Date, etc. In the event of

          (a) any taking by the  Company of a record of the holders of any class
     of securities  for the purpose of determining  the holders  thereof who are
     entitled to receive any  dividend  or other  distribution,  or any right to
     subscribe  for,  purchase or  otherwise  acquire any shares of stock of any
     class or any other  securities or property,  or to receive any other right,
     or

          (b) any capital reorganization of the Company, any reclassification or
     recapitalization of the capital stock of the Company or any transfer of all
     or  substantially  all the assets of the  Company to, or  consolidation  or
     merger of the Company with or into, any other person, or

          (c)  any  voluntary  or   involuntary   dissolution,   liquidation  or
     winding-up of the Company,


COMMON STOCK PURCHASE WARRANT NO. 3- Page 6                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>


then, and in each such event, the Company will mail or cause to be mailed to the
Holder of this Warrant a notice specifying (i) the date on which any such record
is to be taken for the  purpose of such  dividend,  distribution  or right,  and
stating the amount and character of such dividend,  distribution  or right,  and
(ii)   the   date  on   which   any   such   reorganization,   reclassification,
recapitalization,  transfer, consolidation,  merger, dissolution, liquidation or
winding-up  is to take place,  and the time,  if any, as of which the holders of
record of Common Stock (or Other Securities) shall be entitled to exchange their
shares of Common Stock (or Other  Securities)  for  securities or other property
deliverable   on  such   reorganization,   reclassification,   recapitalization,
transfer,  consolidation,  merger, dissolution,  liquidation or winding-up. Such
notice  shall be mailed  at least 20 days  prior to the date  specified  in such
notice on which any action is to be taken.

     8. Reservation of Stock, etc. Issuable on Exercise of Warrant.  The Company
will at all times reserve and keep  available,  solely for issuance and delivery
on the  exercise  of  this  Warrant,  all  shares  of  Common  Stock  (or  Other
Securities) from time to time issuable on the exercise of this Warrant.

     9. Exchange of Warrant. On surrender for exchange of this Warrant, properly
endorsed,  to the Company,  the Company at its expense will issue and deliver to
or on the order of the holder  thereof a new Warrant of like tenor,  in the name
of such Holder or as such  Holder (on  payment by such holder of any  applicable
transfer  taxes)  may  direct,  calling  in the  aggregate  on the face or faces
thereof for the number of shares of Common  Stock  called for on the face of the
Warrant so surrendered.

     10. Replacement of Warrant. On receipt of evidence reasonably  satisfactory
to the Company of the loss,  theft,  destruction  or  mutilation of this Warrant
and, in the case of any such loss,  theft or  destruction  of this  Warrant,  on
delivery of an indemnity agreement or security  reasonably  satisfactory in form
and amount to the Company or, in the case of any such  mutilation,  on surrender
and  cancellation  of this Warrant,  the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.

     11. Remedies. The Company stipulates that the remedies at law of the Holder
of this Warrant in the event of any default by the Company in the performance of
or  compliance  with any of the  terms of this  Warrant  are not and will not be
adequate,  and that such terms may be specifically  enforced by a decree for the
specific  performance  of any  agreement  contained  herein or by an  injunction
against a violation of any of the terms hereof or otherwise.

     12. Negotiability, etc. This Warrant is issued upon the following terms, to
all of which each  Holder or owner  hereof by the  taking  hereof  consents  and
agrees:

          (a) title to this Warrant may be transferred  by  endorsement  (by the
     Holder  hereof  executing  the form of  assignment  at the end  hereof) and
     delivery  in the  same  manner  as in the case of a  negotiable  instrument
     transferable by endorsement and delivery;


COMMON STOCK PURCHASE WARRANT NO. 3- Page 7                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>

          (b) any person in  possession  of this  Warrant  properly  endorsed is
     authorized to represent  himself as absolute  owner hereof and is empowered
     to transfer  absolute title hereto by endorsement  and delivery hereof to a
     bona fide purchaser hereof for value;  each prior taker or owner waives and
     renounces  all of his  equities or rights in this  Warrant in favor of each
     such bona fide  purchaser,  and each such bona fide purchaser shall acquire
     absolute title hereto and to all rights represented hereby;

          (c) until this Warrant is transferred on the books of the Company, the
     Company may treat the registered Holder hereof as the absolute owner hereof
     for all purposes, notwithstanding any notice to the contrary; and

          (d)  notwithstanding  the  foregoing,  this  Warrant  may not be sold,
     transferred  or  assigned  except  pursuant  to an  effective  registration
     statement  under the  Securities  Act of 1933, as amended (the "Act"),  or,
     pursuant to an applicable exemption therefrom (including in accordance with
     Regulation D promulgated under the Act).

     13. Registration Rights. The Company is obligated to register the shares of
Common Stock issuable upon exercise of this Warrant in accordance with the terms
of a Registration  Rights Agreement between the Company and the Holder dated the
date hereof.

     14. Notices,  etc. All notices and other communications from the Company to
the  holder  of this  Warrant  shall be  mailed  by first  class  registered  or
certified mail,  postage prepaid,  at such address as may have been furnished to
the Company in writing by the Holder or,  until any the Holder  furnishes to the
Company an  address,  then to, and at the  address  of, the last  Holder of this
Warrant who has so furnished an address to the Company.

     15. Miscellaneous. This Warrant and any term hereof may be changed, waived,
discharged  or terminated  only by an instrument in writing  signed by the party
against which  enforcement of such change,  waiver,  discharge or termination is
sought.  This Warrant  shall be construed  and enforced in  accordance  with and
governed by the internal  laws of the State of New York,  except where the Texas
Business  Corporation Act or other law applies. The headings in this Warrant are
for purposes of reference  only, and shall not limit or otherwise  affect any of
the terms hereof.  The invalidity or  unenforceability  of any provision  hereof
shall in no way affect the validity or enforceability of any other provision.


COMMON STOCK PURCHASE WARRANT NO. 3- Page 8                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>

DATED as of October 14, 1997.



                                        TAKE-TWO INTERACTIVE SOFTWARE, INC.


                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------







COMMON STOCK PURCHASE WARRANT NO. 3- Page 9                            Warrant 3
(Take-Two Interactive Software, Inc.)



<PAGE>

                                    EXHIBIT A

                      FORM OF NOTICE OF EXERCISE - WARRANT

                (To be executed only upon exercise or conversion
                       of the Warrant in whole or in part)

To Take-Two Interactive Software, Inc.

     The  undersigned  registered  holder  of the  accompanying  Warrant  hereby
exercises  such  Warrant or  portion  thereof  for,  and  purchases  thereunder,
______________1 shares of Common Stock (as defined in such Warrant) and herewith
makes payment  therefor in the amount and manner set forth below, as of the date
written below. The undersigned requests that the certificates for such shares of
Common Stock be issued in the name of, and delivered to, _______________________
_________________________________ whose address is _____________________________
______________________________________________.

     The Exercise Price is paid as follows:

     |_|  Bank draft payable to the Company in the amount of $__________.

     |_|  Wire  transfer  to  the  account  of the  Company  in  the  amount  of
          $________.

     |_|  Delivery of  ___________  previously  held shares  having an aggregate
          Market Value of $_________.

     |_|  Cashless  exercise.  Surrender of __________ shares  purchasable under
          this  Warrant  for such  shares of Common  Stock  issuable in exchange
          therefor  pursuant to the Cashless  Exercise  provisions of the within
          Warrant, as provided in Section 1.1(iv) thereto.

     Upon  exercise  pursuant to this Notice of Exercise,  the holder will be in
compliance  with the  Limitation  on  Exercise  (as  defined  in the  Securities
Purchase Agreement pursuant to which this Warrant was issued).

Dated:  ____________________

                               _________________________________________________
                               (Name must conform to name of holder as specified
                               on the face of the Warrant)

                               By:______________________________________________
                                  Name:_________________________________________
                                  Title:________________________________________

Address of holder:

                               _________________________________________________

                               _________________________________________________

                               _________________________________________________


Date of exercise: __________________________

- --------
1    Insert  the number of shares of Common  Stock as to which the  accompanying
     Warrant  is being  exercised.  In the  case of a  partial  exercise,  a new
     Warrant  or  Warrants  will  be  issued  and  delivered,  representing  the
     unexercised portion of the accompanying Warrant, to the holder surrendering
     the same.





                          REGISTRATION RIGHTS AGREEMENT

     REGISTRATION RIGHTS AGREEMENT (this  "Agreement"),  dated as of October 14,
1997, among TAKE-TWO  INTERACTIVE  SOFTWARE,  INC., a Delaware  corporation (the
"Company"),  and  the  other  undersigned  parties  hereto,  (collectively,  the
"Funds").

     1. Introduction. The Company and the Funds have today executed that certain
Securities Purchase Agreement (the "Note Purchase Agreement"), pursuant to which
the Company has agreed,  among other things, to issue an aggregate of $4,200,000
(U.S.) principal amount of 10% Convertible Notes of the Company (the "Notes") to
the  Funds  or their  successors,  assigns  or  transferees  (collectively,  the
"Holders").  The Notes are convertible into an  indeterminable  number of shares
(the "Note Conversion Shares") of the Company's common stock, par value $.01 per
share (the  "Common  Stock"),  pursuant to the terms of the Notes.  In addition,
pursuant  to the  terms  of the Note  Purchase  Agreement  and the  transactions
contemplated  thereby,  the Company has issued to the Funds (i) an  aggregate of
50,000  shares of Common  Stock  (the  "Grant  Shares")  and (ii)  Common  Stock
Purchase  Warrants  exercisable for an aggregate  250,000 shares of Common Stock
(the "Warrant Shares"). The Company has agreed to issue an indeterminable number

of  additional  shares of Common  Stock (the  "Additional  Grant  Shares") on or
before July 7, 1998, upon the occurrence of certain events specified in the Note
Purchase Agreement.  The number of Note Conversion Shares, Grant Shares, Warrant
Shares and Additional Grant Shares  (collectively,  the "Securities") is subject
to adjustment upon the occurrence of stock splits, recapitalizations and similar
events occurring after the date hereof. The Company represents and warrants that
the Company's Common Stock is currently eligible for trading on the Nasdaq Stock
Market's  SmallCap Market ("SmallCap  Market") under the symbol "TTWO".  Certain
capitalized  terms  used in this  Agreement  are  defined  in  Section 3 hereof;
references to sections shall be to sections of this Agreement.

     2. Registration under Securities Act, etc.

     2.1 Registration on Request.

     (a) Registration of Registrable Securities. As soon as is practicable after
the Closing Date (as defined in the Note  Purchase  Agreement),  but in no event
later than April 14, 1998,  demand for which is hereby  given and  acknowledged,
the  Company  shall  prepare  and file a  registration  statement  to effect the
registration  under the  Securities  Act of all,  but not less than all,  of the
Registrable  Securities  to the extent  requisite to permit the public offer and
sale of such Registrable  Securities.  The Company shall use its best efforts to
cause the  registration  statement  which is the subject of this Section  2.1(a)
(the  "Registration  Statement") to be declared effective by the Commission upon
the earlier to occur of (i) June 15, 1998 or (ii) five (5)  business  days after
receipt of a "no review" letter from the Commission (the "Required Effectiveness
Date").  Nothing  contained  herein  shall be  deemed  to limit  the  number  of


- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT - Page 1
(Take-Two Interactive Software, Inc.)


<PAGE>

Registrable  Securities to be  registered  by the Company as required  under the
Note Purchase  Agreement.  As a result,  should the  Registration  Statement not
relate  to  the  maximum  number  of  Registrable  Securities  acquired  by  (or
potentially  acquirable  by) the holders  thereof upon  conversion  of the Note,
exercise of the Warrant or in  connection  with the  issuance of Grant Shares or
Additional  Grant  Shares,  the  Company  shall be  required  to file a separate
registration  statement  (utilizing Rule 462 promulgated under the Exchange Act,
where  applicable)  relating to such  Registrable  Securities  which then remain
unregistered.  The  provisions of this  Agreement  shall relate to such separate
registration statement as if it were an amendment to the Registration Statement.

     (b) Registration Statement Form. Registrations under this Section 2.1 shall
be on Form S-3 or, in the event the  Company  is not then  eligible  to use such
Form S-3, then such other  appropriate  registration  form of the  Commission as
shall permit the disposition of such  Registrable  Securities in accordance with
the intended method or methods of disposition specified by the Funds;  provided,
however,  such intended method of disposition  shall not include an underwritten
offering of the Registrable Securities.

     (d) Expenses.  The Company will pay all Registration Expenses in connection
with any registration required by this Section 2.1.

     (e) Effective Registration Statement.  The registration pursuant to Section
2.1(a)  shall  not be deemed to have been  effected  (i)  unless a  Registration
Statement has become effective within the time period specified herein, provided
that a registration  which does not become effective after the Company has filed
the  Registration  Statement  solely by reason of the  refusal to proceed of any
holder of Registrable Securities (other than a refusal to proceed based upon the
advice of counsel in the form of a letter signed by such counsel and provided to
the Company  relating to a disclosure  matter unrelated to such holder) shall be
deemed to have been  effected  by the  Company  or (ii) if,  after it has become
effective,  the  Registration  Statement  becomes  subject  to any  stop  order,
injunction  or other order or  extraordinary  requirement  of the  Commission or
other  governmental  agency or court for any reason which is not removed after a
period of thirty (30) days.

     (f) [Intentionally Left Blank]

     (g) [Intentionally Left Blank]

     (h) Plan of  Distribution.  The Company hereby agrees that the Registration
Statement shall include a plan of distribution section reasonably  acceptable to
the Funds and substantially in the form annexed hereto; provided,  however, such
plan of  distribution  section  shall be  modified  by the  Company so as to not
provide for the  disposition  of the  Registrable  Securities on the basis of an
underwritten offering.


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<PAGE>

     2.2 Incidental Registration.

     (a)  Right to  Include  Registrable  Securities.  If (1) any  principal  or
interest shall be  outstanding  under the Notes as of April 15, 1998 (whether or
not then due and owing) and (2) the  Company  proposes  to  register  any of its
securities  under the Securities Act (other than by a registration in connection
with  an  acquisition  in a  manner  which  would  not  permit  registration  of
Registrable  Securities  for sale to the public,  on Form S-8, or any  successor
form thereto, on Form S-4, or any successor form thereto and other than pursuant
to  Section   2.1),  on  an   underwritten   basis   (either   best-efforts   or
firm-commitment  at any time after  April 15,  1998 but  before the third  (3rd)
anniversary  of the date  hereof),  then,  the Company  will each such time give
thirty (30) days written notice to the Sellers'  Representative of its intention
to do so. Upon the written  request of the Sellers'  Representative  made within
twenty  (20) days after the  receipt of any such  notice  (which  request  shall
specify  the  Registrable  Securities  intended  to be  disposed  of by any such
Holder,  the Company will,  subject to the terms of this  Agreement,  effect the
registration  under  the  Securities  Act of up to that  number  of  Registrable
Securities  equal to that  number  of Note  Conversion  Shares  acquirable  upon
conversion of up to 75% of the original  principal amount of the Notes which the
Company has been so requested to register by the Sellers' Representative, to the
extent requisite to permit the disposition of such Registrable  Securities so to
be registered,  by inclusion of such Registrable  Securities in the registration
statement  which covers the securities  which the Company  proposes to register,
provided  that if, at any time after giving  written  notice of its intention to
register any  securities  and prior to the  effective  date of the  registration
statement  filed  in  connection  with  such  registration,  the  Company  shall
determine for any reason either not to register or to delay registration of such
securities,  the  Company  may, at its  election,  give  written  notice of such
determination to each Holder and, thereupon,  (i) in the case of a determination
not to register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration  under this Section 2.2 (but not
from its obligation to pay the Registration  Expenses in connection  therewith),
and (ii) in the case of a determination to delay registering, shall be permitted
to delay  registering  any  Registrable  Securities,  for the same period as the
delay in registering such other securities.  No registration effected under this
Section  2.2  shall  relieve  the  Company  of  its  obligation  to  effect  the
registration  under  Section 2.1, nor shall any such  registration  hereunder be
deemed to have been  effected  pursuant to Section 2.1. The Company will pay all
Registration  Expenses  in  connection  with each  registration  of  Registrable
Securities  requested  pursuant to this  Section  2.2.  The right  provided  the
Holders  of the  Registrable  Securities  pursuant  to  this  Section  shall  be
exercisable  at  their  sole  discretion  and  will in no way  limit  any of the
Company's obligations to pay the Securities according to their terms.

     (b) Priority in Incidental  Registrations.  If the managing  underwriter of
the  underwritten  offering  contemplated  by this  Section 2.2 shall inform the
Company and holders of the Registrable  Securities  requesting such registration
by letter of its belief that the number of Registrable  Securities  requested to
be included in such  registration  exceeds the number  which can be sold in such
offering,  then the Company will include in such registration,  to the extent of
the number  which the  Company is so advised can be sold in such  offering,  (i)
first  securities  proposed by the Company to be sold for its own  account,  and
(ii) second  Registrable  Securities


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<PAGE>

and  securities of other selling  security  holders  requested to be included in
such  registration  pro  rata on the  basis  of the  number  of  shares  of such
securities  so proposed to be sold and so requested  to be  included;  provided,
however, the holders of Registrable Securities shall have priority to all shares
sought to be  included  by  officers  and  directors  of the  Company as well as
holders of ten percent (10%) or more of the Company's Common Stock; and provided
further that in the event the managing  underwriter  determines that the Company
register  securities solely for its own account,  and not for the account of any
selling  shareholders,  the Registrable  Securities will not be included in such
registration statement.

     (c) Holdback Agreements.  Subject to such other reasonable  requirements as
may be imposed by the  underwriter  as a condition of  inclusion of  Registrable
Securities in the  registration  statement,  each Fund agrees by  acquisition of
Registrable Securities, if so required by the managing underwriter, not to sell,
make any short sale of, loan,  grant any option for the purchase of,  effect any
public sale or distribution  of or otherwise  dispose of, except as part of such
underwritten  registration,  any equity  securities of the Company,  during such
reasonable period of time requested by the underwriter;  provided however,  such
period shall not exceed a period commencing 10 days prior to the commencement of
such underwritten  offering and ending 180 days following the completion of such
underwritten offering.

     2.3  Registration  Procedures.  If and  whenever the Company is required to
effect the  registration of any Registrable  Securities under the Securities Act
as provided  in Section  2.1 and, as  applicable,  2.2,  the Company  shall,  as
expeditiously as possible:

          (i) prepare and file with the Commission the Registration Statement to
     effect such registration  (including such audited  financial  statements as
     may  be  required  by the  Securities  Act or  the  rules  and  regulations
     promulgated  thereunder);  provided nothing  contained herein shall require
     the Company to undergo an audit except in the  ordinary  course of business
     and as otherwise  required to effect the  registration  of the  Registrable
     Securities and  thereafter use its best efforts to cause such  registration
     statement  to  be  declared  effective  by  the  Commission,   as  soon  as
     practicable, but in any event no later than the Required Effectiveness Date
     in Section 2.4;  provided,  however,  that at least two (2)  Business  Days
     before filing such Registration  Statement or any amendments  thereto,  the
     Company will furnish to the counsel  selected by the holders of Registrable
     Securities  which are to be  included in such  registration,  copies of all
     such documents proposed to be filed;

          (ii) with respect to any  Registration  Statement  pursuant to Section
     2.1(a),   prepare  and  file  with  the  Commission   such  amendments  and
     supplements  to such  registration  statement  and the  prospectus  used in
     connection  therewith  as  may  be  necessary  to  keep  such  registration
     statement effective and to comply with the provisions of the Securities Act
     with respect to the  disposition of all Registrable  Securities  covered by
     such  registration  statement  until the earlier to occur of five (5) years
     after  the date of this  Agreement  or such  time as all of the  securities
     which  are  the  subject  of  such  registration   statement  cease  to  be
     Registrable  Securities  (such  period,  in each  case,  the


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(Take-Two Interactive Software, Inc.)


<PAGE>

     "Registration Maintenance Period");  provided,  however, that if the Common
     Stock Purchase Warrants have been exercised,  the Registration  Maintenance
     Period shall be reduced to two (2) years;

          (iii) furnish to each seller of Registrable Securities covered by such
     registration statement such number of conformed copies of such registration
     statement and of each such amendment and  supplement  thereto (in each case
     including all exhibits),  such number of copies of the prospectus contained
     in such registration  statement (including each preliminary  prospectus and
     any summary prospectus) and any other prospectus filed under Rule 424 under
     the Securities Act, in conformity  with the  requirements of the Securities
     Act, and such other  documents,  as such seller may  reasonably  request in
     order to facilitate the public sale or other disposition of the Registrable
     Securities owned by such seller;

          (iv) use its reasonable efforts to register or qualify all Registrable
     Securities  and other  securities  covered by such  registration  statement
     under such  other  securities  laws or blue sky laws as any seller  thereof
     shall reasonably  request,  to keep such registrations or qualifications in
     effect for so long as such registration  statement  remains in effect,  and
     take any other  action  which may be  reasonably  necessary  to enable such
     seller  to  consummate  the  disposition  in  such   jurisdictions  of  the
     securities owned by such seller,  except that the Company shall not for any
     such  purpose be required to qualify  generally to do business as a foreign
     corporation  in  any  jurisdiction   wherein  it  would  not  but  for  the
     requirements of this subdivision (iv) be obligated to be so qualified or to
     consent to general service of process in any such jurisdiction;

          (v) [Intentionally Left Blank]

          (vi) [Intentionally Left Blank]

          (vii) notify the Sellers'  Representative and its counsel promptly and
     confirm  such advice in writing  promptly  after the Company has  knowledge
     thereof:

               (v)  when  the  registration  statement,  the  prospectus  or any
          prospectus  supplement related thereto or post-effective  amendment to
          the  registration  statement has been filed,  and, with respect to the
          registration  statement or any post-effective  amendment thereto, when
          the same has become effective;

               (w)  of  any  request  by  the   Commission   for  amendments  or
          supplements  to the  registration  statement or the  prospectus or for
          additional information;

               (x)  of  the  issuance  by  the  Commission  of  any  stop  order
          suspending  the  effectiveness  of the  registration  statement or the
          initiation of any proceedings by any Person for that purpose; and


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(Take-Two Interactive Software, Inc.)


<PAGE>

               (y) of  the  receipt  by the  Company  of any  notification  with
          respect to the  suspension  of the  qualification  of any  Registrable
          Securities  for  sale  under  the  securities  or blue sky laws of any
          jurisdiction  or the  initiation or threat of any  proceeding for such
          purpose;

          (viii) notify each seller of  Registrable  Securities  covered by such
     registration  statement,  at any time when a prospectus relating thereto is
     required to be delivered  under the Securities Act, upon discovery that, or
     upon the  happening  of any  event as a result  of  which,  the  prospectus
     included in such  registration  statement,  as then in effect,  includes an
     untrue  statement of a material  fact or omits to state any  material  fact
     required to be stated therein or necessary to make the  statements  therein
     not misleading in the light of the circumstances then existing,  and at the
     reasonable  request of any such seller promptly prepare and furnish to such
     seller a reasonable  number of copies of a supplement to or an amendment of
     such prospectus as may be necessary so that, as thereafter delivered to the
     purchasers of such securities,  such prospectus shall not include an untrue
     statement of a material  fact or omit to state a material  fact required to
     be  stated  therein  or  necessary  to  make  the  statements  therein  not
     misleading in the light of the circumstances then existing;

          (ix) use its reasonable  efforts to obtain the withdrawal of any order
     suspending the effectiveness of the registration  statement at the earliest
     possible moment;

          (x) otherwise use its best efforts to comply with all applicable rules
     and  regulations  of the  Commission,  and make  available  to its security
     holders, as soon as reasonably practicable,  an earnings statement covering
     the period of at least twelve  months,  but not more than eighteen  months,
     beginning  with the first full calendar  month after the effective  date of
     such  registration  statement,  which earnings  statement shall satisfy the
     provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;

          (xi) use its  reasonable  efforts to list all  Registrable  Securities
     covered by such registration  statement on any securities exchange on which
     any of the Registrable Securities are then listed.

     The Company may require each seller of  Registrable  Securities as to which
any  registration  is being  effected to furnish the  Company  such  information
regarding such seller and the distribution of such securities as the Company may
from time to time reasonably request in writing.

     The Company will not file any registration  statement or amendment  thereto
or  any  prospectus  or  any  supplement   thereto   (including  such  documents
incorporated  by reference and proposed to be filed after the initial  filing of
the  registration   statement)  to  which  the  Sellers'   Representative  shall
reasonably  object,  provided  that the Company may file such document in a form
required by law or upon the advice of its counsel.


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(Take-Two Interactive Software, Inc.)


<PAGE>

     The  Company   represents  and  warrants  to  each  holder  of  Registrable
Securities   that  it  has  obtained  all   necessary   waivers,   consents  and
authorizations   necessary  to  execute  this   Agreement  and   consummate  the
transactions  contemplated  hereby  other  than such  waivers,  consents  and/or
authorizations specifically contemplated by the Note Purchase Agreement.

     Each Fund agrees  that,  upon receipt of any notice from the Company of the
occurrence  of any event of the kind  described  in  subdivision  (viii) of this
Section 2.3, such Fund will  forthwith  discontinue  such Fund's  disposition of
Registrable  Securities pursuant to the registration  statement relating to such
Registrable   Securities  until  such  Fund's  receipt  of  the  copies  of  the
supplemented or amended  prospectus  contemplated by subdivision  (viii) of this
Section 2.3 and, if so directed by the Company,  will deliver to the Company (at
the Company's  expense) all copies,  other than permanent  file copies,  then in
such Fund's possession of the prospectus relating to such Registrable Securities
current at the time of receipt of such notice.

     If any such  registration  statement  refers to any  Holder of  Registrable
Securities by name or otherwise as the holder of any  securities of the Company,
then such holder  shall have the right to require (a) the  insertion  therein of
language,  in form and substance reasonably  satisfactory to such holder, to the
effect that the holding by such holder of such securities is not to be construed
as a  recommendation  by such holder of the investment  quality of the Company's
securities covered thereby and that such holding does not imply that such holder
will assist in meeting any future financial  requirements of the Company, or (b)
in the event that such  reference  to such  holder by name or  otherwise  is not
required by the Securities Act or any similar federal statute then in force, the
deletion of the reference to such holder.

     2.4 Underwritten Offerings. [Intentionally Omitted]

     2.5  Preparation;   Reasonable   Investigation.   In  connection  with  the
preparation and filing of each  registration  statement under the Securities Act
pursuant to this  Agreement,  the Company  will give the holders of  Registrable
Securities  registered under such registration  statement,  and their respective
counsel and  accountants,  the  opportunity to participate in the preparation of
such registration statement,  each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, and will give each
of them such access to its books and records and such  opportunities  to discuss
the  business  of the  Company  with its  officers  and the  independent  public
accountants  who have certified its financial  statements as shall be necessary,
in the  reasonable  opinion of such holders' and such  underwriters'  respective
counsel,  to  conduct a  reasonable  investigation  within  the  meaning  of the
Securities Act.

     2.6 Registration Default Fee. If the Registration Statement contemplated in
Section 2.1 is (x) not declared effective by the Required  Effectiveness Date or
(y)  such  effectiveness  is not  maintained  for the  Registration  Maintenance
Period,  then the Company  shall pay to the Funds the Default Fee  specified  in
Section 10.1 of the Note Purchase Agreement.



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(Take-Two Interactive Software, Inc.)


<PAGE>

     2.7 Indemnification.

     (a) Indemnification by the Company. In the event of any registration of any
Registrable  Securities  under the Securities  Act, the Company will, and hereby
does  agree to,  indemnify  and hold  harmless  the  holder  of any  Registrable
Securities covered by such registration  statement,  its directors and officers,
each other Person who  participates as an underwriter in the offering or sale of
such  securities and each other Person,  if any, who controls such holder or any
such  underwriter  within the meaning of the  Securities Act against any losses,
claims,  damages or liabilities,  joint or several,  to which such holder or any
such director or officer or underwriter or controlling person may become subject
under the Securities Act or otherwise,  insofar as such losses,  claims, damages
or liabilities (or actions or proceedings,  whether commenced or threatened,  in
respect  thereof) arise out of or are based upon any untrue statement or alleged
untrue  statement of any material fact contained in any  registration  statement
under which such  securities  were  registered  under the  Securities  Act,  any
preliminary  prospectus,   final  prospectus  or  summary  prospectus  contained
therein,  or any  amendment or  supplement  thereto,  or any omission or alleged
omission  to state  therein a material  fact  required  to be stated  therein or
necessary to make the statements  therein not  misleading,  and the Company will
reimburse  such  holder  and  each  such  director,  officer,   underwriter  and
controlling  person for any legal or any other expenses  reasonably  incurred by
them in  connection  with  investigating  or  defending  any such  loss,  claim,
liability,  action or proceeding,  provided that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage,  liability (or
action or  proceeding in respect  thereof) or expense  arises out of or is based
upon an untrue  statement  or alleged  untrue  statement  or omission or alleged
omission made in such registration  statement,  any such preliminary prospectus,
final prospectus,  summary prospectus,  amendment or supplement in reliance upon
and in  conformity  with  written  information  furnished to the Company by such
holder or underwriter stating that it is for use in the preparation thereof and,
provided  further  that the  Company  shall  not be  liable  to any  Person  who
participates as an underwriter in the offering or sale of Registrable Securities
or to any other Person, if any, who controls such underwriter within the meaning
of the Securities Act, in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense arises
out of such Person's failure to send or give a copy of the final prospectus,  as
the same may be then  supplemented  or amended,  within the time required by the
Securities Act to the Person  asserting the existence of an untrue  statement or
alleged  untrue  statement  or omission  or alleged  omission at or prior to the
written  confirmation  of the sale of  Registrable  Securities to such Person if
such  statement  or  omission  was  corrected  in such  final  prospectus  or an
amendment or supplement  thereto.  Such indemnity shall remain in full force and
effect  regardless of any  investigation  made by or on behalf of such holder or
any such director, officer,  underwriter or controlling person and shall survive
the transfer of such securities by such holder.

     (b) Indemnification by the Sellers. The Company may require, as a condition
to including any  Registrable  Securities in any  registration  statement  filed
pursuant to this  Agreement,  that the Company  shall have received an agreement
satisfactory to it from the prospective  seller of such Registrable  Securities,
to indemnify and hold harmless (in the same manner and to the same extent as set
forth in subdivision (a) of this Section 2.7) the Company,


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(Take-Two Interactive Software, Inc.)


<PAGE>

each director of the Company, each officer of the Company and each other Person,
if any, who controls the Company within the meaning of the Securities  Act, with
respect to any statement or alleged statement in or omission or alleged omission
from such registration statement,  any preliminary prospectus,  final prospectus
or summary prospectus contained therein, or any amendment or supplement thereto,
if such statement or alleged  statement or omission or alleged omission was made
in reliance upon and in  conformity  with written  information  furnished to the
Company through an instrument duly executed by such seller specifically  stating
that  it  is  for  use  in  the  preparation  of  such  registration  statement,
preliminary  prospectus,  final  prospectus,  summary  prospectus,  amendment or
supplement. Any such indemnity shall remain in full force and effect, regardless
of any  investigation  made by or on behalf of the Company or any such director,
officer or controlling  person and shall survive the transfer of such securities
by such seller.

     (c) Notices of Claims.  etc. Promptly after receipt by an indemnified party
of notice of the  commencement  of any action or  proceeding  involving  a claim
referred to in the preceding  subdivisions of this Section 2.7, such indemnified
party will, if a claim in respect  thereof is to be made against an indemnifying
party,  give written  notice to the latter of the  commencement  of such action,
provided  that the failure of any  indemnified  party to give notice as provided
herein shall not relieve the  indemnifying  party of its  obligations  under the
preceding  subdivisions  of this  Section  2.7,  except to the  extent  that the
indemnifying  party is actually  prejudiced  by such failure to give notice.  In
case any such action is brought  against an  indemnified  party,  unless in such
indemnified  party's  reasonable  judgment a conflict of interest  between  such
indemnified  and  indemnifying  parties may exist in respect of such claim,  the
indemnifying party shall be entitled to participate in and to assume the defense
thereof,  jointly with any other indemnifying party similarly  notified,  to the
extent  that  the   indemnifying   party  may  wish,  with  counsel   reasonably
satisfactory to such  indemnified  party, and after notice from the indemnifying
party to such  indemnified  party  of its  election  so to  assume  the  defense
thereof,  the indemnifying  party shall not be liable to such indemnified  party
for  any  legal  or  other  expenses  subsequently  incurred  by the  latter  in
connection   with  the  defense   thereof   other  than   reasonable   costs  of
investigation.   No  indemnifying  party  shall,  without  the  consent  of  the
indemnified party, consent to entry of any judgment or enter into any settlement
of any such action which does not include as an  unconditional  term thereof the
giving by the claimant or plaintiff to such indemnified  party of a release from
all liability, or a covenant not to sue, in respect to such claim or litigation.
No  indemnified  party shall  consent to entry of any judgment or enter into any
settlement  of any such  action  the  defense  of which has been  assumed  by an
indemnifying party without the consent of such indemnifying party.

     (d) Other Indemnification. Indemnification similar to that specified in the
preceding  subdivisions  of this  Section 2.7 (with  appropriate  modifications)
shall be given by the  Company and each seller of  Registrable  Securities  (but
only if and to the extent required pursuant to the terms of 2.7(b)) with respect
to any required  registration  or other  qualification  of securities  under any
Federal or state law or regulation of any governmental authority, other than the
Securities Act.


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<PAGE>

     (e) Indemnification  Payments. The indemnification required by this Section
2.7 shall be made by periodic  payments of the amount  thereof during the course
of the  investigation  or  defense,  as and when bills are  received or expense,
loss, damage or liability is incurred.

     (f)  Contribution.  If the  indemnification  provided for in the  preceding
subdivisions  of this  Section 2.7 is  unavailable  to an  indemnified  party in
respect of any expense,  loss, claim,  damage or liability  referred to therein,
then each indemnifying  party, in lieu of indemnifying  such indemnified  party,
shall  contribute to the amount paid or payable by such  indemnified  party as a
result of such expense,  loss, claim, damage or liability (i) in such proportion
as is  appropriate to reflect the relative  benefits  received by the Company on
the one hand and the  holder  or  underwriter,  as the case may be, on the other
from the  distribution of the  Registrable  Securities or (ii) if the allocation
provided  by clause  (i)  above is not  permitted  by  applicable  law,  in such
proportion as is appropriate to reflect not only the relative  benefits referred
to in clause  (i) above but also the  relative  fault of the  Company on the one
hand and of the  holder  or  underwriter,  as the case may be,  on the  other in
connection  with the  statements  or omissions  which  resulted in such expense,
loss,   damage  or  liability,   as  well  as  any  other   relevant   equitable
considerations.  The relative  benefits  received by the Company on the one hand
and the holder or  underwriter,  as the case may be, on the other in  connection
with the distribution of the Registrable Securities shall be deemed to be in the
same  proportion  as the total net  proceeds  received by the  Company  from the
initial  sale of the  Registrable  Securities  by the Company to the  purchasers
pursuant to the Note  Purchase  Agreement  and the Warrants bear to the gain, if
any,  realized  by all selling  holders  participating  in such  offering or the
underwriting discounts and commissions received by the underwriter,  as the case
may be. The  relative  fault of the Company on the one hand and of the holder or
underwriter,  as the case may be, on the other shall be  determined by reference
to,  among other  things,  whether the untrue or alleged  untrue  statement of a
material  fact or  omission  to state a material  fact  relates  to  information
supplied by the Company,  by the holder or by the  underwriter  and the parties'
relative intent, knowledge,  access to information and opportunity to correct or
prevent such  statement or omission,  provided that the  foregoing  contribution
agreement  shall  not  inure  to  the  benefit  of  any  indemnified   party  if
indemnification  would be unavailable to such indemnified party by reason of the
provisions  contained in the first sentence of  subdivision  (a) of this Section
2.7,  and in no  event  shall  the  obligation  of  any  indemnifying  party  to
contribute under this  subdivision (f) exceed the amount that such  indemnifying
party  would  have  been  obligated  to pay by  way  of  indemnification  if the
indemnification provided for under subdivisions (b) of this Section 2.7 had been
available under the circumstances.

     The Company and the holders of Registrable  Securities  agree that it would
not be just and equitable if contribution  pursuant to this subdivision (f) were
determined by pro rata allocation (even if the holders and any underwriters were
treated as one entity for such  purpose)  or by any other  method of  allocation
that does not take account of the  equitable  considerations  referred to in the
immediately  preceding  paragraph.  The amount paid or payable by an indemnified
party as a result of the losses,  claims, damages and liabilities referred to in
the immediately  preceding paragraph shall be deemed to include,  subject to the
limitations  set forth in the  preceding


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(Take-Two Interactive Software, Inc.)


<PAGE>

sentence and  subdivision  (c) of this Section 2.7, any legal or other  expenses
reasonably  incurred by such indemnified party in connection with  investigating
or defending any such action or claim.

     Notwithstanding  the  provisions  of this  subdivision  (f),  no  holder of
Registrable Securities or underwriter shall be required to contribute any amount
in excess of the  amount  by which (i) in the case of any such  holder,  the net
proceeds received by such holder from the sale of Registrable Securities or (ii)
in the  case of an  underwriter,  the  total  price  at  which  the  Registrable
Securities  purchased  by it and  distributed  to the public were offered to the
public exceeds,  in any such case, the amount of any damages that such holder or
underwriter  has  otherwise  been  required  to pay by reason of such  untrue or
alleged   untrue   statement  or  omission.   No  Person  guilty  of  fraudulent
misrepresentation  (within the meaning of Section 11(f) of the  Securities  Act)
shall be  entitled  to  contribution  from any person who was not guilty of such
fraudulent misrepresentation.

     3. Definitions.  As used herein, unless the context otherwise requires, the
following terms have the following respective meanings:

     "Commission":  The Securities and Exchange  Commission or any other Federal
agency at the time administering the Securities Act.

     "Common Stock": As defined in Section 1.

     "Company": As defined in the introductory paragraph of this Agreement.

     "Conversion Shares": As defined in Section 1.

     "Exchange  Act": The Securities  Exchange Act of 1934, as amended,  and the
rules and regulations of the Commission thereunder.

     "Notes":  As defined in  Section  1, such term to  include  any  securities
issued in substitution of or in addition to such Notes.

     "Note Purchase Agreement": As defined in Section 1.

     "Person": A corporation, association, partnership,  organization, business,
individual,  governmental  or political  subdivision  thereof or a  governmental
agency.

     "Preferred  Stock":  As defined  in  Section  1, such term to  include  any
securities issued in substitution of or in addition to such Preferred Stock.

     "Registrable  Securities":  The  Securities  and any  securities  issued or
issuable with respect to such Securities by way of stock dividend or stock split
or in  connection  with  a  combination  of  shares,  recapitalization,  merger,
consolidation  or other  reorganization  or  otherwise.  Once  issued,  any such
securities shall cease to be Registrable  Securities upon the


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(Take-Two Interactive Software, Inc.)


<PAGE>

earlier of (a) the sale of such securities pursuant to an effective registration
statement under the Securities Act, (b) the  distribution  thereof to the public
pursuant to Rule 144 (or any successor  provision) under the Securities Act, (c)
a transfer  pursuant  to which new  certificates  for them not  bearing a legend
restricting  further  transfer  shall have been  delivered  by the  Company  and
subsequent  disposition of them shall not require  registration or qualification
of them under the  Securities  Act or any similar  state law then in force,  (d)
they shall have ceased to be outstanding,  (e) upon completion of the applicable
Registration Maintenance Period, or (f) any and all legends restricting transfer
thereof have been removed in accordance  with the  provisions of Rule 144(k) (or
any successor  provision)  under the Securities  Act; and provided that the Note
Conversion Shares shall cease to become Registrable Securities upon repayment in
full of the Notes.

     "Registration Expenses": All expenses incident to the Company's performance
of or its compliance with this Agreement,  including,  without  limitation,  all
registration,  filing and NASD fees,  all stock  exchange  and  SmallCap  Market
listing  fees,  all fees and expenses of complying  with  securities or blue sky
laws, all word  processing,  duplicating  and printing  expenses,  messenger and
delivery expenses,  the fees and disbursements of counsel for the Company and of
its  independent  public   accountants,   and  any  fees  and  disbursements  of
underwriters customarily paid by issuers or sellers of securities, but excluding
underwriting discounts and commissions and transfer taxes paid or payable by the
holders of Registrable Securities.

     "Registration Maintenance Period": As defined in Section 2.3.

     "Required Effectiveness Date": As defined in Section 2.1.

     "Securities Act": The Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder.

     "Sellers' Representative":  HW Partners L.P., as long as one or more of the
Funds  shall be a Holder or such  Person  designated  by HW  Partners  L.P.  (or
subsequent  Sellers'  Representative)  at the time of disposition of the last of
the  Notes  held  by  one  or  more  of  the  Funds  (or   subsequent   Sellers'
Representative).

     4. Rule 144. The Company shall timely file the reports required to be filed
by it under the  Securities  Act and the Exchange Act (including but not limited
to the reports  under  Sections 13 and 15(d) of the  Exchange Act referred to in
subparagraph (c) of Rule 144 adopted by the Commission under the Securities Act)
and the rules and regulations  adopted by the Commission  thereunder (or, if the
Company is not  required  to file such  reports,  will,  upon the request of any
holder of Registrable Securities, make publicly available other information) and
will take such  further  action as any  holder  of  Registrable  Securities  may
reasonably request,  all to the extent required from time to time to enable such
holder to sell Registrable  Securities without registration under the Securities
Act within the limitation of the  exemptions  provided by (a) Rule 144 under the
Securities  Act,  as such  Rule may be  amended  from  time to time,  or (b) any
similar rule or regulation hereafter adopted by the Commission.



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(Take-Two Interactive Software, Inc.)


<PAGE>

     5.  Amendments  and Waivers.  This Agreement may be amended and the Company
may take  any  action  herein  prohibited,  or omit to  perform  any act  herein
required to be  performed  by it, only if the Company  shall have  obtained  the
written  consent to such  amendment,  action or omission to act by the  Sellers'
Representative.  Each holder of  Registrable  Securities  hereby  authorizes the
Sellers'  Representative  to take such action relating to this Agreement and the
Registrable  Securities  as it  shall  in  its  good  faith  determination  deem
appropriate. Each holder of any Registrable Securities at the time or thereafter
outstanding shall be bound by any consent  authorized by this Section 5, whether
or not such  Registrable  Securities  shall have been  marked to  indicate  such
consent.

     6.  Nominees  for  Beneficial  Owners.  In the event  that any  Registrable
Securities  are  held  by a  nominee  for  the  beneficial  owner  thereof,  the
beneficial owner thereof may, at its election,  be treated as the holder of such
Registrable Securities for purposes of any request or other action by any holder
or  holders  of  Registrable  Securities  pursuant  to  this  Agreement  or  any
determination  of any number or percentage of shares of  Registrable  Securities
held by any holder or holders of  Registrable  Securities  contemplated  by this
Agreement.  If the beneficial owner of any Registrable Securities so elects, the
Company may require  assurances  reasonably  satisfactory  to it of such owner's
beneficial ownership of such Registrable Securities.

     7. Notices.  Except as otherwise  provided in this Agreement,  all notices,
requests and other  communications to any Person provided for hereunder shall be
in writing and shall be given to such  Person (a) in the case of a party  hereto
other than the  Company,  addressed to such party in the manner set forth in the
Note  Purchase  Agreement  or at such other  address  as such  party  shall have
furnished  to the Company in writing,  or (b) in the case of any other holder of
Registrable Securities,  at the address that such holder shall have furnished to
the Company in writing,  or,  until any such other  holder so  furnishes  to the
Company  an  address,  then to and at the  address  of the last  holder  of such
Registrable  Securities  who has furnished an address to the Company,  or (c) in
the case of the Company,  at the address set forth on the signature page hereto,
to the attention of its President, or at such other address, or to the attention
of such other  officer,  as the Company  shall have  furnished to each holder of
Registrable  Securities at the time  outstanding.  Each such notice,  request or
other communication shall be effective (i) if given by mail, 72 hours after such
communication  is  deposited  in the mails with  first  class  postage  prepaid,
addressed as aforesaid or (ii) if given by any other means  (including,  without
limitation,  by fax or air  courier),  when  delivered at the address  specified
above,  provided  that any such notice,  request or  communication  shall not be
effective until received.

     8.  Assignment.  This  Agreement  shall be  binding  upon and  inure to the
benefit of and be enforceable by the parties hereto. In addition, and whether or
not any  express  assignment  shall  have  been  made,  the  provisions  of this
Agreement which are for the benefit of the parties hereto other than the Company
shall also be for the benefit of and enforceable by any subsequent holder of any
Registrable Securities, subject to the provisions respecting the minimum numbers
or  percentages  of shares of  Registrable  Securities  required  in order to be
entitled to certain rights, or take certain actions.  contained herein.  Each of
the Holders of the Registrable  Securities  agrees,  by accepting any portion of
the Registrable Securities after the date hereof, to the provisions of


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REGISTRATION RIGHTS AGREEMENT - Page 13
(Take-Two Interactive Software, Inc.)


<PAGE>

this  Agreement  including,  without  limitation,  appointment  of the  Sellers'
Representative  to act on behalf of such  Holder  pursuant  to the terms  hereof
which such actions  shall be made in the good faith  discretion  of the Sellers'
Representative and be binding on all persons for all purposes.

     9. Descriptive  Headings.  The descriptive headings of the several sections
and  paragraphs of this  Agreement are inserted for reference only and shall not
limit or otherwise affect the meaning hereof.

     10.  GOVERNING  LAW.  THIS  AGREEMENT  SHALL BE  CONSTRUED  AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF
THE STATE OF NEW YORK WITHOUT REFERENCE TO THE PRINCIPLES OF CONFLICTS OF LAWS.

     11.  Counterparts.  This  Agreement may be executed by facsimile and may be
signed  simultaneously  in any number of  counterparts,  each of which  shall be
deemed an original,  but all such counterparts shall together constitute one and
the same instrument.

     12. Entire  Agreement.  This  Agreement  embodies the entire  agreement and
understanding  between the Company and each other party  hereto  relating to the
subject  matter hereof and supersedes  all prior  agreements and  understandings
relating to such subject matter.

     13. Severability. If any provision of this Agreement, or the application of
such  provisions  to any  Person or  circumstance,  shall be held  invalid,  the
remainder of this Agreement,  or the application of such provision to Persons or
circumstances  other  than  those  to  which it is held  invalid,  shall  not be
affected thereby.




                            [Signature Page Follows]






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REGISTRATION RIGHTS AGREEMENT - Page 14
(Take-Two Interactive Software, Inc.)


<PAGE>

     IN WITNESS  WHEREOF,  the parties have caused this Agreement to be executed
and delivered by their respective  officers  thereunto duly authorized as of the
date first above written.

                                        TAKE-TWO INTERACTIVE SOFTWARE,
                                        INC.

                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------

                                        Address:     575 Broadway
                                                     6th Floor
                                                     New York, New York 10012
                                        Telephone:
                                        Fax:         (212)941-2997
                                        Attn:        Ryan A. Brant

           With a copy to:              HW Partners, L.P.
                                        1601 Elm Street
                                        4000 Thanksgiving Tower
                                        Dallas, Texas75201
                                        Telephone:  (214)720-1600
                                        Fax:  (214)720-1662
                                        Attn:  Barrett Wissman


                                        INFINITY INVESTORS LIMITED


                                        By:  /s/  James E. Martin
                                                  ------------------------------
                                        Name:     James E. Martin
                                                  ------------------------------
                                        Title:    Director
                                                  ------------------------------

                                        Address:  38 Hertford Street
                                                  London, England WIY 7TG
                                                  Telephone: 011-44-171-355-4975
                                                  Attn: J. A. Loughran






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REGISTRATION RIGHTS AGREEMENT - Page 15
(Take-Two Interactive Software, Inc.)


<PAGE>



                                        INFINITY EMERGING OPPORTUNITIES
                                        LIMITED


                                        By:  /s/  James E. Martin
                                                  ------------------------------
                                        Name:     James E. Martin
                                                  ------------------------------
                                        Title:    Director
                                                  ------------------------------

                                        Address: 38 Hertford Street
                                                 London, England WIY 7TG
                                                 Telephone:  011-44-171-355-4975
                                                 Attn: J. A. Loughran


                                        GLACIER CAPITAL LIMITED


                                        By:  /s/  James E. Martin
                                                  ------------------------------
                                        Name:     James E. Martin
                                                  ------------------------------
                                        Title:    President
                                                  ------------------------------

                                        Address: 38 Hertford Street
                                                 London, England WIY 7TG
                                                 Telephone:  011-44-171-355-4975
                                                 Attn: J. A. Loughran








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REGISTRATION RIGHTS AGREEMENT - Page 16
(Take-Two Interactive Software, Inc.)


<PAGE>




                                   Acknowledged:


                                   HW PARTNERS, L.P., as Sellers' Representative

                                   By:  HW Finance, L.L.C., its general partner


                                   By:  /s/  Stuart Chasanoff
                                             ------------------------------
                                   Name:     Stuart Chasanoff
                                             ------------------------------
                                   Title:    Vice-President
                                             ------------------------------







- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT - Page 17
(Take-Two Interactive Software, Inc.)





                               SECURITY AGREEMENT

     SECURITY  AGREEMENT  dated  October 14, 1997 between  TAKE-TWO  INTERACTIVE
SOFTWARE, INC. ("Borrower"),  a Delaware corporation,  and HW PARTNERS, L.P., as
agent for and representative (in such capacity, "Pledgee") of Infinity Investors
Limited,  Infinity  Emerging  Opportunities  Limited and Glacier Capital Limited
("Lenders") under the Purchase Agreement (as hereinafter defined).

                              W I T N E S S E T H:

     WHEREAS,  pursuant to that certain Securities  Purchase Agreement dated the
date hereof  between  Borrower and Lenders (as the same may from time to time be
amended,  modified or  supplemented,  the  "Purchase  Agreement"),  Borrower has
issued to Lenders its  Convertible  Notes dated the date hereof (the "Notes") in
the aggregate principal amount of $4,200,000 payable by Borrower to the order of
Lenders; and

     WHEREAS,  Lenders  are  willing  to  purchase  the  Notes but only upon the
condition,  among  others,  that  Borrower  shall have executed and delivered to
Pledgee this Security Agreement.

     NOW,  THEREFORE,  in  consideration  of the  premises  and  of  the  mutual
covenants  herein contained and for other good and valuable  consideration,  the
receipt of which is hereby acknowledged, the parties hereto agree as follows:

     1. Defined Terms.  Unless
  otherwise  defined herein,  terms defined in the
Purchase  Agreement are used herein as therein defined,  and the following terms
shall have the following  meanings (such  meanings  being equally  applicable to
both   the    singular    and    plural    forms   of   the   terms    defined):

          "Account  Debtor"  shall mean any  "account  debtor,"  as such term is
     defined in Section 9-105 of the UCC.

          "Accounts"  shall  mean any  "account,"  as such  term is  defined  in
     Section 9-106 of the UCC, now owned or hereafter  acquired by Borrower and,
     in any event, shall include,  without limitation,  all accounts receivable,
     book debts and other forms of obligations  now owned or hereafter  received
     or  acquired  by or  belonging  or owing to  Borrower  (including,  without
     limitation,  under any trade names,  styles or divisions  thereof)  whether
     arising  out of goods sold or  services  rendered  by  Borrower or from any
     other transaction (including, without limitation, any such obligation which
     might be  characterized  as an account or contract right under the UCC) and
     all of Borrower's  rights in, to and under all purchase  orders or receipts
     now owned or  hereafter  acquired  by it for goods,  and all of  Borrower's


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SECURITY AGREEMENT - Page 1
(Take-Two Interactive Software, Inc.)



<PAGE>

     rights to any goods represented by any of the foregoing (including, without
     limitation, unpaid seller's rights of rescission, replevin, reclamation and
     stoppage  in  transit  and rights to  returned,  reclaimed  or  repossessed
     goods), and all moneys due or to become due to Borrower under the Contracts
     and all contracts for the sale of goods or the  performance  of services or
     both by Borrower  (whether or not yet earned by  performance on the part of
     Borrower or in connection with any other transaction),  now in existence or
     hereafter occurring,  including,  without limitation,  the right to receive
     the proceeds of said  purchase  orders and  contracts,  and all  collateral
     security and guarantees of any kind given by any Person with respect to any
     of the  foregoing,  to the extent any of the  foregoing  are  related to or
     arise out of sales or distribution of Products by Borrower.

          "Collateral" shall have the meaning assigned to such term in Section 2
     of this Security Agreement.

          "Contracts"   shall  mean  all  contracts,   undertakings,   or  other
     agreements in or under which  Borrower may now or hereafter have any right,
     title or  interest,  including,  without  limitation,  with  respect  to an
     Account,  any  agreement  relating  to the terms of payment or the terms of
     performance  thereof,  to the extent any of the foregoing are related to or
     arise out of sales or distribution of Products by Borrower. As used in this
     Security  Agreement,  "Contracts" shall include,  without  limitation,  the
     Letters of Credit.

          "Documents"  shall  mean any  "documents"  as such term is  defined in
     Section 9-105 of the UCC, now owned or hereafter  acquired by Borrower,  to
     the extent  any of the  foregoing  are  related to or arise out of sales or
     distribution of Products by Borrower.

          "General  Intangibles"  shall mean any "general  intangibles," as such
     term is  defined  in  Section  9-106 of the  UCC,  now  owned or  hereafter
     acquired by Borrower and, in any event, shall include,  without limitation,
     all right,  title and interest  which Borrower may now or hereafter have in
     or under any Contract, all customer lists, rights in intellectual property,
     licenses, permits,  copyrights,  trade secrets, proprietary or confidential
     information,  inventions  (whether  patented  or  patentable  or  not)  and
     technical information,  procedures, designs, knowledge, know-how, software,
     data  bases,  data,  skill,  expertise,   experience,   processes,  models,
     drawings,  materials  and  records  now  owned  or  hereafter  acquired  by
     Borrower, goodwill and rights of indemnification,  to the extent any of the
     foregoing are related to or arise out of sales or  distribution of Products
     by Borrower.

          "hereby," "herein," "hereof,"  "hereunder" and words of similar import
     refer to this Security Agreement as a whole (including, without limitation,
     any schedules hereto) and not merely to the specific section,  paragraph or
     clause in which the respective word appears.

          "Lockbox Account" shall mean any lockbox account established  pursuant
     to Section 3.9 of the Purchase Agreement.



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SECURITY AGREEMENT - Page 2
(Take-Two Interactive Software, Inc.)



<PAGE>

          "Letters  of Credit"  shall mean all  letters  of credit  under  which
     Borrower  is  a  beneficiary,   issued  in  connection  with  the  sale  or
     distribution  of Products,  now existing or  hereafter  arising,  including
     without  limitation the letters of credit listed on Schedule I hereto,  and
     all amendments,  renewals,  modifications,  restatements  and extensions of
     such letters of credit,  in an aggregate amount not to exceed the principal
     amount due and owing under the Convertible Notes outstanding at any time.

          "Permitted Junior Liens" shall mean the security  interests granted by
     Borrower  to secure  payment of the  National  Bank of Canada  Debt and the
     Citibank Debt, provided that such security interests have been subordinated
     to the  security  interests  granted  to  Pledgee  and  Lenders  under this
     Security Agreement in a manner reasonably satisfactory to Pledgee.

          "Proceeds"  shall mean "proceeds," (as such term is defined in Section
     9-306 of the UCC) and, in any event, shall include, without limitation, (i)
     any and all  proceeds  of any  insurance,  indemnity,  warranty or guaranty
     payable  to  Borrower  from  time  to  time  with  respect  to  any  of the
     Collateral,  (ii) any and all payments (in any form whatsoever) made or due
     and  payable  to  Borrower  from  time  to  time  in  connection  with  any
     requisition,  confiscation,  condemnation,  seizure or forfeiture of all or
     any part of the Collateral by any governmental body,  authority,  bureau or
     agency (or any person  acting under color of  governmental  authority)  and
     (iv) any and all other  amounts from time to time paid or payable  under or
     in connection with any of the Collateral.

          "Secured Obligations" shall mean (i) all indebtedness, obligations and
     liabilities  of Borrower to Secured  Parties under the Purchase  Agreement,
     the Notes and the other  Financing  Documents,  now  existing or  hereafter
     arising, whether direct, indirect,  related,  unrelated, fixed, contingent,
     liquidated,  unliquidated,  joint,  several or joint and several,  (ii) all
     accrued but unpaid  interest on any of the  indebtedness  described  in (i)
     above,  (iii) all  obligations  of  Borrower to Secured  Parties  under any
     documents evidencing,  securing,  governing and/or pertaining to all or any
     part of the  indebtedness  described in (i) and (ii) above,  (iv) all costs
     and expenses  incurred by Pledgee or Secured Parties in connection with the
     collection and  administration  of all or any part of the  indebtedness and
     obligations  described in (i),  (ii) and (iii) above or the  protection  or
     preservation  of, or realization  upon, the collateral  securing all or any
     part of such indebtedness and obligations, including without limitation all
     reasonable attorneys' fees and (v) all renewals, extensions,  modifications
     and  rearrangements  of the indebtedness and obligations  described in (i),
     (ii), (iii) and (iv) above.

          "Secured Parties" means each of the Lenders and any subsequent holders
     of the Notes.

          "Security  Agreement" shall mean this Security Agreement,  as the same
     may from time to time be amended,  modified or supplemented and shall refer
     to this Security  Agreement as in effect of the date such reference becomes
     operative.



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SECURITY AGREEMENT - Page 3
(Take-Two Interactive Software, Inc.)



<PAGE>

          "UCC" shall mean the  Uniform  Commercial  Code as the same may,  from
     time to time, be in effect in the State of New York; provided,  however, in
     the event that, by reason of mandatory provisions of law, any or all of the
     attachment,  perfection  or priority of Lender's  security  interest in any
     Collateral  is governed by the  Uniform  Commercial  Code as in effect in a
     jurisdiction  other than the State of New York,  the term "UCC"  shall mean
     the Uniform  Commercial  Code as in effect in such other  jurisdiction  for
     purposes of the provisions  hereof relating to such attachment,  perfection
     or priority and for purposes of definitions related to such provisions.

     2. Grant of Security  Interest.  As collateral  security for the prompt and
complete  payment  and  performance  when due  (whether at stated  maturity,  by
acceleration or otherwise) of all the Secured  Obligations and to induce Lenders
to enter into the Purchase  Agreement  and to purchase  the Notes in  accordance
with the terms thereof,  Borrower hereby assigns, conveys,  mortgages,  pledges,
hypothecates  and  transfers  to Pledgee  (on behalf of and as agent for Secured
Parties) and Secured Parties,  and hereby grants to Pledgee (on behalf of and as
agent for Secured  Parties) and Secured  Parties a security  interest in, all of
Borrower's  right,  title and  interest in, to and under the  following  (all of
which being hereinafter collectively called the "Collateral"):

          (i)  all Letters of Credit,  including without  limitation all Letters
               of Credit  delivered  to Lender  pursuant  to Section  3.9 of the
               Purchase Agreement;

          (ii) all Accounts of Borrower;

          (iii) all Contracts of Borrower;

          (iv) all Documents of Borrower;

          (v)  all General Intangibles of Borrower;

          (vi) all rights of  Borrower  in and to the  Lockbox  Account  and all
               amounts deposited therein; and

         (vii) to the extent not  otherwise  included,  all  Proceeds of each of
               the  foregoing  and  all   accessions   to,   substitutions   and
               replacements  for, and rents,  profits and product of each of the
               foregoing.

     3. Rights of Pledgee; Limitations on Pledgee's Obligations.

     (a) It is  expressly  agreed  by  Borrower  that,  anything  herein  to the
contrary  notwithstanding,  Borrower  shall  remain  liable  under  each  of its
Contracts  to observe and  perform  all the  conditions  and  obligations  to be
observed and  performed by it thereunder  and Borrower  shall perform all of its
duties and  obligations  thereunder,  all in accordance with and pursuant to the
terms and  provisions of each such Contract.  Pledgee and Secured  Parties shall
not have any obligation or liability  under any Contract by reason of or arising
out of this Security Agreement or the granting to


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SECURITY AGREEMENT - Page 4
(Take-Two Interactive Software, Inc.)



<PAGE>

Pledgee and  Secured  Parties of a security  interest  therein or the receipt by
Pledgee or any Secured  Party of any payment  relating to any Contract  pursuant
hereto,  nor shall  Pledgee or any Secured Party be required or obligated in any
manner to  perform  or  fulfill  any of the  obligations  of  Borrower  under or
pursuant to any Contract,  or to make any payment,  or to make any inquiry as to
the nature or the  sufficiency of any payment  received by it or the sufficiency
of any  performance  by any party under any Contract,  or to present or file any
claim,  or to take any  action to  collect or  enforce  any  performance  or the
payment of any amounts  which may have been assigned to it or to which it may be
entitled at any time or times.


     (b) Pledgee authorizes  Borrower to collect its Accounts provided that such
collection is performed in a prudent and businesslike  manner,  and Pledgee may,
after the  earlier to occur of (x) January 1, 1998 or (y) the  occurrence  of an
Event of Default or Lockbox Event which is continuing,  without notice, limit or
terminate  said  authority  at any  time.  After the  occurrence  of an Event of
Default or Lockbox Event, all Proceeds of such collections, when first collected
by Borrower,  received in payment of any  Accounts in which  Pledgee and Secured
Parties have been granted a security interest herein or on account of any of its
Contracts  in which  Pledgee and Secured  Parties  have been  granted a security
interest herein,  shall be promptly  deposited by Borrower in precisely the form
received (with all necessary  endorsements)  in the Lockbox  Account  subject to
withdrawal by Pledgee only, as  hereinafter  provided,  and until so turned over
shall be deemed to be held in trust by Borrower for Pledgee and Secured  Parties
and shall not be commingled  with  Borrower's  other funds or  properties.  Such
Proceeds,  when deposited,  shall continue to be collateral  security for all of
the Secured  Obligations and shall not constitute  payment thereof until applied
as  hereinafter  provided.  Pledgee may at any time apply all or any part of the
funds on deposit in the Lockbox  Account to the  principal  of or interest on or
both in  respect  of any of the  Secured  Obligations  in  accordance  with  the
provisions  of Section  8(d)  hereof and any part of such  funds  which  Pledgee
elects not so to apply and deemed not  required as  collateral  security for the
Secured Obligations shall be paid over from time to time by Pledgee to Borrower.
If an Event of  Default  has  occurred  and is  continuing,  at the  request  of
Pledgee,  Borrower  shall  deliver to Pledgee all original  and other  documents
evidencing  and relating to the  performance  of labor or service  which created
such Accounts,  including,  without  limitation,  all original  purchase orders,
invoices and shipping  receipts;  and,  prior to the  occurrence  of an Event of
Default,  Borrower shall deliver  photocopies thereof to Pledgee at its request.
Borrower  shall  maintain  the Lockbox  Account in effect at all times after its
establishment.

     (c) Pledgee may at any time, upon the occurrence and during the continuance
of any Event of Default,  after first notifying  Borrower of its intention to do
so, notify Account  Debtors of Borrower and parties to the Contracts of Borrower
that the  Accounts  and the right,  title and  interest of Borrower in and under
such  Contracts  have been assigned to Pledgee and that  payments  shall be made
directly to Pledgee.  Upon the request of Pledgee,  Borrower will so notify such
Account Debtors and parties to such  Contracts.  After the occurrence and during
the continuance of an Event of Default,  Pledgee may at any time in its own name
or in the name of others  communicate  with such Account  Debtors and parties to
such  Contracts  to verify  with such  Persons  to  Pledgee's  satisfaction  the
existence, amount and terms of any such Accounts or Contracts.


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<PAGE>

     (d) Upon  reasonable  prior notice to Borrower  (unless an Event of Default
has occurred and is continuing,  in which case no notice is necessary),  Pledgee
shall have the right to make test  verifications  of the  Accounts  through  any
medium that it  considers  advisable,  and  Borrower  agrees to furnish all such
assistance  and  information  as Pledgee may  reasonably  require in  connection
therewith.  Prior to the occurrence and during the  continuation  of an Event of
Default,  such verification shall be in Borrower's name. Borrower at its expense
will prepare and deliver to Pledgee,  upon Pledgee's request made not more often
than monthly,  the following reports:  (i) a reconciliation of all its Accounts,
(ii) an  aging  of all its  Accounts,  (iii)  trial  balances,  and  (iv) a test
verification of such Accounts as Pledgee may request.

     (e) Pledgee shall at any time  (irrespective of the occurrence of any Event
of Default) have the exclusive  right to draw under the letters of credit listed
on Schedule I hereto in accordance with their  respective  terms. At the request
of Pledgee, Borrower shall provide to Pledgee, immediately after the same become
available, any and all invoices,  packing lists, bills of lading,  certificates,
instruments  and other  documents  necessary in the sole  judgment of Pledgee to
permit or facilitate such draws.

     4. Representations and Warranties.  Borrower hereby represents and warrants
that:

     (a) Except for the security  interest  granted to Pledgee  pursuant to this
Security  Agreement and Permitted Junior Liens,  Borrower is or will be the sole
owner of each item of the  Collateral  in which it  purports to grant a security
interest hereunder,  having good and marketable title thereto, free and clear of
any and all liens,  security interests or other encumbrances.  No amount payable
under or in  connection  with any of its Accounts or Contracts  are evidenced by
instruments which have not been delivered to Pledgee.

     (b)  No  effective  security  agreement,  financing  statement,  equivalent
security or lien instrument or continuation  agreement  covering all or any part
of the Collateral is on file or of record in any public  office,  except such as
may have been filed by  Borrower in favor of Pledgee  pursuant to this  Security
Agreement or filed in connection with Permitted Junior Liens.

     (c) Upon the filing of financing statements in the form of Exhibit A hereto
describing the items or types of Collateral as to which  security  interests may
be  perfected  by the  filing  of a  financing  statement  under  the UCC in the
jurisdictions  listed on Schedule  II hereto and the  delivery to Pledgee of the
original letters of credit listed on Schedule I hereto,  this Security Agreement
shall be  effective  to create and  perfect a valid and  continuing  lien on and
perfected  security interest in such Collateral with respect to which a security
interest  may be  perfected  by filing or the  obtaining  of  possession  of the
Collateral pursuant to the UCC in favor of Pledgee,  prior to all other security
interests  (other  than the  security  interests  granted to Pledgee  under this
Security  Agreement and Permitted  Junior Liens),  and is enforceable as such as
against  creditors of and  purchasers  from  Borrower.  All action  necessary or
desirable  to protect and  perfect  such  security  interest in each item of the
Collateral has been duly taken.


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<PAGE>


     (d) The address of  Borrower's  principal  place of business  and the place
where its records  concerning  the  Collateral are kept is set forth on Schedule
III hereto,  and Borrower  will not change such  principal  place of business or
remove such records unless it has taken such action as is necessary to cause the
security  interest of Pledgee in the  Collateral  to  continue to be  perfected.
Borrower will not change its principal  place of business or the place where its
records  concerning  the Collateral is kept without giving 30 days prior written
notice thereof to Pledgee.

     (e) The amount  represented  by  Borrower  to Pledgee  from time to time as
owing by each  Account  Debtor  or by all  Account  Debtors  in  respect  of the
Accounts will at such time be the correct  amount  actually and  unconditionally
owing by such Account Debtors thereunder.

     (f) Each of the letters of credit  listed on Schedule I hereto  constitutes
the legal,  valid and  binding  obligation  of the issuer  thereof,  enforceable
against  it in  accordance  with its  terms.  Borrower  has  taken  all  actions
necessary  to provide for the  transfer  to Pledgee of all its right,  title and
interest in, to and under the letters of credit  listed on Schedule I hereto and
Pledgee has the right to draw under such  letters of credit in  accordance  with
their respective  terms.  Such transfers are enforceable  against the issuers of
such letters of credit and creditors of Borrower.

     5.  Covenants.  Borrower  covenants  and agrees with  Pledgee that from and
after the date of this Security Agreement and until the Secured  Obligations are
fully satisfied:

     (a) Further Documentation; Pledge of Instruments. At any time and from time
to time,  upon the  written  request  of  Pledgee,  and at the sole  expense  of
Borrower,  Borrower  will promptly and duly execute and deliver any and all such
further  instruments  and documents and take such further  action as Pledgee may
reasonably deem necessary to obtain the full benefits of this Security Agreement
and of the rights and powers  herein  granted,  including,  without  limitation,
using its best  efforts  to secure  all  consents  and  approvals  necessary  or
appropriate for the assignment to Pledgee of any Contract held by Borrower or in
which  Borrower  has any  rights  not  heretofore  assigned,  the  filing of any
financing or continuation statements under the UCC with respect to the liens and
security  interests  granted  hereby and  transferring  Collateral  to Pledgee's
possession  (if a security  interest  in such  Collateral  can be  perfected  by
possession).  Borrower also hereby authorizes Pledgee to file any such financing
or  continuation  statement  without  the  signature  of  Borrower to the extent
permitted by applicable law. A photocopy of this Security Agreement may be filed
as a financing statement.  If any amount payable under or in connection with any
of  the  Collateral  shall  be or  become  evidenced  by  any  instrument,  such
instrument shall be immediately pledged to Pledgee hereunder,  and shall be duly
endorsed in a manner satisfactory to Pledgee and delivered to Pledgee.

     (b) Maintenance of Records. Borrower will keep and maintain at its own cost
and expense  satisfactory  and complete  records of the  Collateral,  including,
without  limitation,  a record of all payments  received and all credits granted
with respect to the Collateral and all other dealings with the  Collateral.  For
Pledgee's  further  security,  Borrower agrees that Pledgee shall have a special
property  interest  in all of  Borrower's  books and records  pertaining  to the
Collateral and, upon the occurrence and during the  continuation of any Event of
Default,  Borrower  shall  deliver


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<PAGE>

and turn over any such books and records to Pledgee or to its representatives at
any time on demand of Pledgee.  Prior to the  occurrence  of an Event of Default
and  upon   reasonable   notice  from   Pledgee,   Borrower   shall  permit  any
representative  of Pledgee to inspect  such books and  records  upon  reasonable
notice and during normal business hours, and will provide photocopies thereof to
Pledgee.

     (c) Indemnification.  In any suit,  proceeding or action brought by Pledgee
or any Secured  Party  relating  to any  Account or  Contract  for any sum owing
thereunder,  or to enforce any  provision of any Account or  Contract,  Borrower
will save,  indemnify  and keep Pledgee and Secured  Parties  harmless  from and
against all expense,  loss or damage suffered by reason of any defense,  setoff,
counterclaim,  recoupment  or reduction of liability  whatsoever  of the obligor
thereunder,  arising out of a breach by Borrower of any obligation thereunder or
arising out of any other agreement,  indebtedness or liability at any time owing
to, or in favor of, such obligor or its successors  from Borrower,  and all such
obligations of Borrower shall be and remain enforceable against and only against
Borrower and shall not be enforceable against Pledgee or any Secured Party.

     (d)  Compliance  with Laws,  etc.  Borrower  will  comply,  in all material
respects, with all acts, rules,  regulations,  orders, decrees and directions of
any governmental authority,  applicable to the Collateral or any part thereof or
to the operation of Borrower's business;  provided,  however,  that Borrower may
contest any act, regulation, order, decree or direction in any reasonable manner
which  shall  not,  in the  reasonable  opinion  of  Pledgee,  adversely  affect
Pledgee's  rights  hereunder  or  adversely  affect  the first  priority  of its
security interest in the Collateral.

     (e) Payment of Obligations.  Borrower will pay promptly when due all taxes,
assessments and governmental charges or levies imposed upon the Collateral.

     (f)  Compliance  with Terms of  Accounts,  etc.  Borrower  will perform and
comply with all  obligations  in respect of Accounts and Contracts and all other
agreements to which it is a party or by which it is bound.

     (g) Limitation on Liens on Collateral.  Borrower will not create, permit or
suffer to exist,  and will  defend the  Collateral  against  and take such other
action  as is  necessary  to  remove,  any  lien,  security  interest  or  other
encumbrance on the Collateral  except for Permitted  Liens,  and will defend the
right,  title and interest of Pledgee in and to any of  Borrower's  rights under
the Accounts,  Contracts,  Documents and General Intangibles and to the Proceeds
thereof against the claims and demands of all Persons whomsoever.

     (h) Limitations on Modifications of Accounts,  etc. Upon the occurrence and
during the  continuation  of any Event of Default,  Borrower  will not,  without
Pledgee's prior written  consent,  grant any extension of the time of payment of
any of the Accounts,  compromise,  compound or settle the same for less than the
full  amount  thereof,  release,  wholly or partly,  any  Person  liable for the
payment thereof, or allow any credit or discount whatsoever thereon.


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<PAGE>

     (i) Limitations on Disposition.  Borrower will not sell, lease, transfer or
otherwise dispose of any of the Collateral except,  subject to the provisions of
this  Agreement,  for the  performance  of Contracts  and the  collection of its
Accounts in the ordinary course of its business.

     (j) Further Identification of Collateral.  Borrower will if so requested by
Pledgee furnish to Pledgee, as often as Pledgee reasonably requests,  statements
and schedules  further  identifying and describing the Collateral and such other
reports in connection with the Collateral as Pledgee may reasonably request, all
in reasonable detail.

     (k) Notices.  Borrower  will advise  Pledgee  promptly,  after it learns of
same,  in  reasonable  detail,  (i) of any  material  lien,  security  interest,
encumbrance or claim made or asserted  against any of the Collateral  other than
Permitted  Liens,  (ii)  of  any  material  change  in  the  composition  of the
Collateral,  and (iii) of the  occurrence  of any other event which would have a
material  adverse  effect on the  aggregate  value of the  Collateral  or on the
security interests created hereunder.

     (l) Right of  Inspection.  Upon  reasonable  notice to Borrower  (unless an
Event  Default  has  occurred  and is  continuing,  in which  case no  notice is
necessary),  Pledgee  shall at all times have full and free access during normal
business  hours and upon  reasonable  notice to all the  books and  records  and
correspondence of Borrower,  and Pledgee or its  representatives may examine the
same, take extracts therefrom and make photocopies  thereof, and Borrower agrees
to render to Pledgee,  at Borrower's  cost and expense,  such clerical and other
assistance as may be reasonably requested with regard thereto.

     (m) Continuous  Perfection.  Borrower will not change its name, identity or
corporate structure in any manner which might make any financing or continuation
statement filed in connection  herewith seriously  misleading within the meaning
of Section 9-402 of the UCC (or any other then applicable  provision of the UCC)
unless  Borrower  shall have given Pledgee at least 30 days prior written notice
thereof  and shall  have taken all  action  (or made  arrangements  to take such
action substantially simultaneously with such change if it is impossible to take
such action in advance)  necessary or  reasonably  requested by Pledgee to amend
such financing  statement or continuation  statement so that it is not seriously
misleading.

     6. Pledgee's Appointment as Attorney-in-Fact.

     (a) Borrower hereby  irrevocably  constitutes and appoints  Pledgee and any
officer  or agent  thereof,  with full  power of  substitution,  as its true and
lawful  attorney-in-fact  with full irrevocable power and authority in the place
and stead of Borrower and in the name of Borrower or in its own name,  from time
to time in Pledgee's reasonable discretion,  for the purpose of carrying out the
terms of this Security Agreement,  to take any and all appropriate action and to
execute and deliver any and all documents and instruments which may be necessary
or desirable to accomplish the purpose of this Security  Agreement and,  without
limiting the  generality  of the


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<PAGE>

foregoing,  hereby  gives  Pledgee the power and right,  on behalf of  Borrower,
without notice to or assent by Borrower to do the following:

          (i)  to ask,  demand,  collect,  receive  and  give  acquittances  and
               receipts  for any and all  moneys due and to become due under any
               Collateral  and,  in the  name of  Borrower  or its  own  name or
               otherwise,  to take  possession  of and  endorse  and collect any
               checks,  drafts, notes,  acceptances or other Instruments for the
               payment  of monies due under any  Collateral,  to access all post
               office boxes  maintained by or for Borrower for the collection of
               any of the Collateral, and to file any claim or to take any other
               action or  proceeding  in any court of law or equity or otherwise
               deemed  appropriate  by Pledgee for the purpose of collecting any
               and all such moneys due under any Collateral whenever payable and
               to file any claim or to take any other  action or  proceeding  in
               any court of law or equity or  otherwise  deemed  appropriate  by
               Pledgee for the purpose of collecting any and all such moneys due
               under any Collateral whenever payable;

          (ii) to pay or discharge  taxes,  liens,  security  interests or other
               encumbrances  levied  or  placed  on or  threatened  against  the
               Collateral,  to effect any repairs or any insurance called for by
               the terms of this  Security  Agreement and to pay all or any part
               of the premiums therefor and the costs thereof; and

          (iii)(A) to direct any party  liable for any payment  under any of the
               Collateral  to make  payment  of any and all moneys  due,  and to
               become due  thereunder,  directly to Pledgee or as Pledgee  shall
               direct;  (B) to receive  payment of and  receipt  for any and all
               moneys,  claims and other  amounts  due, and to become due at any
               time, in respect of or arising out of any Collateral; (C) to sign
               and  indorse any  invoices,  freight or express  bills,  bills of
               lading,  storage or warehouse  receipts,  drafts against debtors,
               assignments,   verifications   and  notices  in  connection  with
               accounts  and other  Documents  constituting  or  relating to the
               Collateral;  (D) to commence and prosecute any suits,  actions or
               proceedings  at  law  or in  equity  in any  court  of  competent
               jurisdiction to collect the Collateral or any part thereof and to
               enforce  any other  right in  respect of any  Collateral;  (E) to
               defend any suit,  action or proceeding  brought against  Borrower
               with  respect to any  Collateral;  (F) to settle,  compromise  or
               adjust any suit,  action or  proceeding  described  above and, in
               conjunction  therewith,  to give such  discharges  or releases as
               Pledgee may deem  appropriate;  (G) generally to sell,  transfer,
               pledge, make any agreement with respect to or otherwise deal with
               any of the


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<PAGE>

               Collateral  as fully and  completely  as though  Pledgee were the
               absolute owner thereof for all purposes,  and to do, at Pledgee's
               option and Borrower's expense, at any time, or from time to time,
               all acts and things which Pledgee  reasonably  deems necessary to
               protect,  preserve or realize upon the  Collateral  and Pledgee's
               security interest therein,  in order to effect the intent of this
               Security  Agreement,  all as fully and  effectively  as  Borrower
               might do.

     (b)  Pledgee  agrees  that,  except  upon the  occurrence  and  during  the
continuation of an Event of Default,  it will forebear from exercising the power
of attorney or any rights granted to Lender pursuant to this Section 6. Borrower
hereby  ratifies,  to the extent permitted by law, all that said attorneys shall
lawfully do or cause to be done by virtue hereof.  The power of attorney granted
pursuant to this  Section 6 is a power  coupled  with an  interest  and shall be
irrevocable until the Secured Obligations are indefeasibly paid in full.

     (c) The  powers  conferred  on  Pledgee  hereunder  are  solely to  protect
Pledgee's  interests in the  Collateral and shall not impose any duty upon it to
exercise any such powers.  Pledgee shall be accountable only for amounts that it
actually  receives as a result of the exercise of such powers and neither it nor
any of its  officers,  directors,  employees or agents shall be  responsible  to
Borrower  for any act or  failure  to act,  except  for its or their  own  gross
negligence or willful misconduct.

     (d) Borrower  also  authorizes  Pledgee,  at any time and from time to time
upon the occurrence  and during the  continuation  any Event of Default,  (i) to
communicate  in its own name with any party to any  Contract  with regard to the
collateral  assignment of the right, title and interest of Borrower in and under
the Contracts  hereunder and other matters relating thereto and (ii) to execute,
in connection with the sale provided for in Section 8 hereof,  any endorsements,
assignments  or other  instruments of conveyance or transfer with respect to the
Collateral reasonably requested by Pledgee.

     7. Performance by Pledgee of Borrower's  Obligations.  If Borrower fails to
perform or comply with any of its agreements  contained  herein and Pledgee,  as
provided for by the terms of this Security  Agreement,  shall itself  perform or
comply, or otherwise cause performance or compliance,  with such agreement,  the
reasonable expenses of Pledgee or such Secured Party incurred in connection with
such performance or compliance,  together with interest thereon at the rate then
in effect  under the  Notes,  shall be payable  by  Borrower  to Pledgee or such
Secured Party on demand and shall constitute Secured Obligations secured hereby.

     8. Remedies, Rights Upon Default.

     (a) If any or Event of Default shall occur and be  continuing,  Pledgee may
(on behalf of and as agent for  Secured  Parties)  exercise  in  addition to all
other rights and remedies  granted to it in this  Security  Agreement and in any
other  instrument or agreement  securing,  evidencing or relating to the Secured
Obligations,  all rights and remedies of a secured party under


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<PAGE>

the UCC.  Without limiting the generality of the foregoing,  Borrower  expressly
agrees that in any such event  Pledgee,  without  demand of performance or other
demand,  advertisement  or notice of any kind (except the notice specified below
of time and place of public or private  sale) to or upon  Borrower  or any other
Person (all and each of which demands,  advertisements and/or notices are hereby
expressly waived to the maximum extent permitted by the UCC and other applicable
law),  may  forthwith  collect,  receive,   appropriate  and  realize  upon  the
Collateral,  or any part thereof, and/or may forthwith sell, lease, assign, give
an option or options to purchase,  or sell or  otherwise  dispose of and deliver
said  Collateral  (or  contract to do so), or any part  thereof,  in one or more
parcels at public or private sale or sales, at any exchange or broker's board or
at any of Pledgee's offices or elsewhere at such prices as it may deem best, for
cash or on credit or for future delivery without  assumption of any credit risk.
Pledgee  shall have the right upon any such  public  sale or sales,  and, to the
extent  permitted by law,  upon any such private sale or sales,  to purchase the
whole or any part of said  Collateral  so sold,  free of any  right or equity of
redemption,  which  equity of  redemption  Borrower  hereby  releases.  Borrower
further  agrees,  at Pledgee's  request,  to assemble the Collateral and make it
available to Pledgee at places which Pledgee shall reasonably select, whether at
Borrower's  premises or  elsewhere.  Pledgee shall apply the net proceeds of any
such  collection,  recovery,  receipt,  appropriation,  realization  or sale, as
provided in Section 8(d) hereof,  Borrower  remaining  liable for any deficiency
remaining unpaid after such application,  and only after so paying over such net
proceeds  and after the  payment by Lender of any other  amount  required by any
provision of law,  including  Section 9-504 of the UCC, need Lender  account for
the surplus, if any, to Borrower.  To the maximum extent permitted by applicable
law,  Borrower  waives all claims,  damages,  and demands against Pledgee or any
Secured  Party  arising  out of  the  repossession,  retention  or  sale  of the
Collateral  except  such  as  arise  out  of the  gross  negligence  or  willful
misconduct of Pledgee.  Borrower agrees that the Pledgee need not give more than
ten days'  notice  (which  notification  shall be deemed  given  when  mailed or
delivered on an overnight basis,  postage prepaid,  addressed to Borrower at its
address  referred  to in  Section 12 hereof) of the time and place of any public
sale or of the time  after  which a  private  sale may take  place and that such
notice is reasonable notification of such matters.  Borrower shall remain liable
for any  deficiency if the proceeds of any sale or disposition of the Collateral
are  insufficient  to pay all amounts to which  Secured  Parties  are  entitled,
Borrower also being liable for the reasonable fees of any attorneys  employed by
Pledgee or any Secured Party to collect such deficiency.

     (b) Borrower  also agrees to pay all costs of Pledgee and Secured  Parties,
including,   without  limitation,   reasonable   attorneys'  fees,  incurred  in
connection with the enforcement of any of its rights and remedies hereunder.

     (c) Borrower hereby waives presentment,  demand,  protest or any notice (to
the maximum extent  permitted by applicable  law) of any kind in connection with
this Security Agreement or any Collateral.

     (d) The Proceeds of any sale,  disposition or other realization upon all or
any part of the  Collateral  shall be  distributed  by Pledgee in the  following
order of priorities:


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<PAGE>


     first,  to Pledgee in an amount  sufficient  to pay in full the expenses of
Pledgee and Secured Parties in connection  with such sale,  disposition or other
realization,   including  all  reasonable  expenses,  liabilities  and  advances
incurred  or  made  by  Pledgee  in  connection  therewith,  including,  without
limitation, reasonable attorney's fees;

     second, to Pledgee or Secured Parties in an amount equal to the then unpaid
principal  of and  accrued  interest  and  prepayment  premiums,  if any, on the
Secured Obligations;

     third,  to  Pledgee  or  Secured  Parties  in an amount  equal to any other
Secured Obligations which are then unpaid; and

     finally, upon payment in full of all of the Secured Obligations,  to pay to
Borrower,  or its  representatives  or as a court of competent  jurisdiction may
direct, any surplus then remaining from such Proceeds.

     9. Limitation on Pledgee's Duty in Respect of Collateral. Pledgee shall use
reasonable  care with respect to the  Collateral in its  possession or under its
control.  Pledgee  shall not have any  other  duty as to any  Collateral  in its
possession or control or in the possession or control of any agent or nominee of
it or any  income  thereon or as to the  preservation  of rights  against  prior
parties or any other  rights  pertaining  thereto.  Upon  request  of  Borrower,
Pledgee  shall  account  for  any  moneys  received  by it  in  respect  of  any
foreclosure on or disposition of the Collateral.

     10. Reinstatement. This Agreement shall remain in full force and effect and
continue to be effective should any petition be filed by or against Borrower for
liquidation  or  reorganization,  should  Borrower  become  insolvent or make an
assignment  for the  benefit of  creditors  or should a  receiver  or trustee be
appointed  for all or any  significant  part of  Borrower's  assets,  and  shall
continue to be  effective or be  reinstated,  as the case may be, if at any time
payment and  performance of the Secured  Obligations,  or any part thereof,  is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned  by any  obligee of the Secured  Obligations,  whether as a
"voidable preference," "fraudulent conveyance", or otherwise, all as though such
payment or performance had not been made. In the event that any payment,  or any
part  thereof,  is  rescinded,   reduced,  restored  or  returned,  the  Secured
Obligations  shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.

     11. Notices.  Except as otherwise provided herein,  whenever it is provided
herein that any notice, demand, request, consent, approval, declaration or other
communication  shall or may be given to or served upon any of the parties by any
other party,  or whenever  any of the parties  desires to give or serve upon any
other communication with respect to this Security  Agreement,  each such notice,
demand, request, consent, approval,  declaration or other communication shall be
given as set forth in Section 12.1 of the Purchase Agreement.  The giving of any
notice  required  hereunder  may be waived in writing by the party  entitled  to
receive  such  notice.  Failure  or delay in  delivering  copies of any  notice,
demand, request,  consent,  approval,  declaration or other communication to the


- --------------------------------------------------------------------------------
SECURITY AGREEMENT - Page 13
(Take-Two Interactive Software, Inc.)



<PAGE>

persons  designated above to receive copies shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration or
other communication.

     12.  Severability.  Any  provision  of this  Security  Agreement  which  is
prohibited or unenforceable in any jurisdiction  shall, as to such jurisdiction,
be ineffective to the extent of such  prohibition  or  unenforceability  without
invalidating  the  remaining  provisions  hereof,  and any such  prohibition  or
unenforceability   in  any   jurisdiction   shall  not   invalidate   or  render
unenforceable such provision in any other jurisdiction.

     13. No Waiver;  Cumulative Remedies.  Neither Pledgee nor any Secured Party
shall by any act,  delay,  omission or otherwise be deemed to have waived any of
its  rights  or  remedies  hereunder,  and no  waiver  shall be valid  unless in
writing,  signed by Pledgee,  and then only to the extent  therein set forth.  A
waiver by Pledgee or any Secured  Party of any right or remedy  hereunder on any
one  occasion  shall not be  construed  as a bar to any  right or  remedy  which
Pledgee or any Secured Party would otherwise have had on any future occasion. No
failure to exercise  nor any delay in  exercising  on the part of Pledgee or any
Secured  Party,  any right,  power or privilege  hereunder,  shall  operate as a
waiver thereof,  nor shall any single or partial exercise of any right, power or
privilege  hereunder  preclude  any  other or  future  exercise  thereof  or the
exercise  of any other  right,  power or  privilege.  The  rights  and  remedies
hereunder  provided are cumulative and may be exercised  singly or concurrently,
and are not  exclusive of any rights and remedies  provided by law.  None of the
terms or provisions of this Security Agreement may be waived, altered,  modified
or amended  except by an  instrument  in writing,  duly executed by Pledgee and,
where applicable, by Borrower.

     14. Successors and Assigns; Governing Law.

     (a) This Security Agreement and all obligations of Borrower hereunder shall
be binding upon the successors and assigns of Borrower, and shall, together with
the rights and remedies of Pledgee and Secured Parties  hereunder,  inure to the
benefit of Pledgee  and  Secured  Parties,  all future  holders of the Notes and
their  respective  successors  and assigns.  No sales of  participations,  other
sales,  assignments,  transfers or other dispositions of any agreement governing
or  instrument  evidencing  the Secured  Obligations  or any portion  thereof or
interest  therein  shall in any manner affect the security  interest  granted to
Pledgee and Secured Parties hereunder.

     (b) THIS  SECURITY  AGREEMENT  SHALL BE GOVERNED BY, AND BE  CONSTRUED  AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

     15. Further  Indemnification.  Borrower  agrees to pay, and to save Pledgee
and Secured Parties  harmless from, any and all liabilities  with respect to, or
resulting from any delay in paying,  any and all excise,  sales or other similar
taxes which may be payable or  determined  to be payable  with respect to any of
the Collateral or in connection  with any of the  transactions  contemplated  by
this Security Agreement.


- --------------------------------------------------------------------------------
SECURITY AGREEMENT - Page 14
(Take-Two Interactive Software, Inc.)



<PAGE>

     16. Waiver of Jury Trial. BORROWER HEREBY WAIVES ALL RIGHT TO TRIAL BY JURY
IN ANY  ACTION OR  PROCEEDING  TO  ENFORCE  OR  DEFEND  ANY  RIGHTS OR  REMEDIES
HEREUNDER.

     17. Termination. Notwithstanding any other provision of any other Financing
Document,  at such time as (i) the entire unpaid principal  balance of the Notes
and all accrued  interest thereon have been converted in full in accordance with
Article III of the Purchase  Agreement or indefeasibly paid in full ("Payment or
Conversion in Full") and (ii) all other payment  obligations under the Notes and
the  Purchase  Agreement  due  and  owing  as of the  date of  such  Payment  or
Conversion in Full have been  indefeasibly  paid in full, this Agreement and the
security  interests  created hereby shall  terminate.  Upon  termination of this
Agreement and Borrower's written request,  Pledgee will, at Borrower's sole cost
and expense,  return to Borrower  such of the  Collateral as shall not have been
sold or  otherwise  disposed  of or  applied  pursuant  to the terms  hereof and
execute and deliver to Borrower  such  documents  as Borrower  shall  reasonably
request to evidence such termination.


                            [SIGNATURE PAGE FOLLOWS]



- --------------------------------------------------------------------------------
SECURITY AGREEMENT - Page 15
(Take-Two Interactive Software, Inc.)



<PAGE>

     IN WITNESS  WHEREOF,  each of the parties  hereto has caused this  Security
Agreement to be executed and  delivered  by its duly  authorized  officer on the
date first set forth above.

                                            TAKE-TWO INTERACTIVE SOFTWARE, INC.


                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------


Acknowledged:

HW PARTNERS, L.P., as Purchasers' Representative

By: HW Finance, L.L.C., its general partner


By:  /s/  Stuart Chasanoff
          ------------------------------
Name:     Stuart Chasanoff
          ------------------------------
Title:    Vice-President
          ------------------------------




- --------------------------------------------------------------------------------
SECURITY AGREEMENT - Page 16
(Take-Two Interactive Software, Inc.)



<PAGE>

                                   SCHEDULE I

                            LIST OF LETTERS OF CREDIT


<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Letter of Credit Number                         Issuing Bank                                       Face Amount
- -----------------------------------------------------------------------------------------------------------------
       <C>                      <S>                                                                <C>        
        30724824                American National Bank and Trust Company of Chicago                $494,274.96
- -----------------------------------------------------------------------------------------------------------------
       100181521                Bank of New York                                                   $230,160.60
- -----------------------------------------------------------------------------------------------------------------
       100171405                Bank of New York                                                   $1,381,973.55
- -----------------------------------------------------------------------------------------------------------------
       AI1078363                Fleet Bank, N.A.                                                   $446,634.00
- -----------------------------------------------------------------------------------------------------------------
      970917IM1172              Crestar Bank                                                       $460,657.48
- -----------------------------------------------------------------------------------------------------------------
</TABLE>





<PAGE>

                                   SCHEDULE II

                                     FILINGS

DEBTOR            JURISDICTION             FILING OFFICE
- ------            ------------             -------------

Borrower          New York                 UCC Filing Office
                                           State of New York
                                           Department of State
                                           162 Washington Avenue
                                           Albany, NY 12231

Borrower          New York                 New York City Register
                                           Room 202 Surrogate's Court Building
                                           31 Chambers Street
                                           New York, New York 10007




<PAGE>

                                  SCHEDULE III

                               LOCATION OF RECORDS


               Principal Place of Business and Location of Records


                             575 Broadway, 6th Floor
                            New York, New York 10012






<PAGE>

                                    EXHIBIT A


                           Form of Financing Statement







                               SECURITY AGREEMENT


     SECURITY  AGREEMENT  dated  October 14, 1997 between  INVENTORY  MANAGEMENT
SYSTEMS, INC. ("Borrower"),  a Delaware corporation,  and HW PARTNERS,  L.P., as
agent for and representative (in such capacity, "Pledgee") of Infinity Investors
Limited,  Infinity  Emerging  Opportunities  Limited and Glacier Capital Limited
("Lenders") under the Purchase Agreement (as hereinafter defined).

                              W I T N E S S E T H:

     WHEREAS,  pursuant to that certain Securities  Purchase Agreement dated the
date hereof between Take-Two Interactive Software, Inc. ("Take-Two") and Lenders
(as the same may from time to time be  amended,  modified or  supplemented,  the
"Purchase  Agreement"),  Take-Two  has issued to Lenders its  Convertible  Notes
dated  the date  hereof  (the  "Notes")  in the  aggregate  principal  amount of
$4,200,000 payable by Take-Two to the order of Lenders; and

     WHEREAS,  Lenders  are  willing  to  purchase  the  Notes but only upon the
condition,  among others, that Borrower, a wholly-owned  subsidiary of Take-Two,
shall have executed and delivered to Pledgee this Security Agreement.

     NOW,  THEREFORE,  in  consideration  of the  premises  and  of  the  mutual
covenants  herein contained and for other good and valuable  consideration,  the
receipt of which is hereby acknowledged,
 the parties hereto agree as follows:

     1. Defined Terms.  Unless  otherwise  defined herein,  terms defined in the
Purchase  Agreement are used herein as therein defined,  and the following terms
shall have the following  meanings (such  meanings  being equally  applicable to
both the singular and plural forms of the terms defined):

          "Account  Debtor"  shall mean any  "account  debtor,"  as such term is
     defined in Section 9-105 of the UCC.

          "Accounts"  shall  mean any  "account,"  as such  term is  defined  in
     Section 9-106 of the UCC, now owned or hereafter  acquired by Borrower and,
     in any event, shall include,  without limitation,  all accounts receivable,
     book debts and other forms of obligations  now owned or hereafter  received
     or  acquired  by or  belonging  or owing to  Borrower  (including,  without
     limitation,  under any trade names,  styles or divisions  thereof)  whether
     arising  out of goods sold or  services  rendered  by  Borrower or from any
     other transaction (including, without limitation, any such obligation which
     might be  characterized  as an account or contract right under the UCC) and
     all of Borrower's  rights in, to and under all purchase


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(Inventory Management Systems, Inc.)



<PAGE>

     orders or receipts now owned or hereafter acquired by it for goods, and all
     of  Borrower's  rights to any  goods  represented  by any of the  foregoing
     (including,  without  limitation,  unpaid  seller's  rights of  rescission,
     replevin,  reclamation  and  stoppage  in transit  and rights to  returned,
     reclaimed  or  repossessed  goods),  and all moneys due or to become due to
     Borrower under the Contracts and all contracts for the sale of goods or the
     performance  of services or both by Borrower  (whether or not yet earned by
     performance  on the  part of  Borrower  or in  connection  with  any  other
     transaction),  now in existence or hereafter occurring,  including, without
     limitation,  the right to receive the proceeds of said purchase  orders and
     contracts,  and all collateral security and guarantees of any kind given by
     any Person with respect to any of the  foregoing,  to the extent any of the
     foregoing are related to or arise out of sales or  distribution of Products
     by Borrower.

          "Collateral" shall have the meaning assigned to such term in Section 2
     of this Security Agreement.

          "Contracts"   shall  mean  all  contracts,   undertakings,   or  other
     agreements in or under which  Borrower may now or hereafter have any right,
     title or  interest,  including,  without  limitation,  with  respect  to an
     Account,  any  agreement  relating  to the terms of payment or the terms of
     performance  thereof,  to the extent any of the foregoing are related to or
     arise out of sales or distribution of Products by Borrower. As used in this
     Security  Agreement,  "Contracts" shall include,  without  limitation,  the
     Letters of Credit.

          "Documents"  shall  mean any  "documents"  as such term is  defined in
     Section 9-105 of the UCC, now owned or hereafter  acquired by Borrower,  to
     the extent  any of the  foregoing  are  related to or arise out of sales or
     distribution of Products by Borrower.

          "General  Intangibles"  shall mean any "general  intangibles," as such
     term is  defined  in  Section  9-106 of the  UCC,  now  owned or  hereafter
     acquired by Borrower and, in any event, shall include,  without limitation,
     all right,  title and interest  which Borrower may now or hereafter have in
     or under any Contract, all customer lists, rights in intellectual property,
     licenses, permits,  copyrights,  trade secrets, proprietary or confidential
     information,  inventions  (whether  patented  or  patentable  or  not)  and
     technical information,  procedures, designs, knowledge, know-how, software,
     data  bases,  data,  skill,  expertise,   experience,   processes,  models,
     drawings,  materials  and  records  now  owned  or  hereafter  acquired  by
     Borrower, goodwill and rights of indemnification,  to the extent any of the
     foregoing are related to or arise out of sales or  distribution of Products
     by Borrower.

          "hereby," "herein," "hereof,"  "hereunder" and words of similar import
     refer to this Security Agreement as a whole (including, without limitation,
     any schedules hereto) and not merely to the specific section,  paragraph or
     clause in which the respective word appears.

          "Lockbox Account" shall mean any lockbox account established  pursuant
     to Section 3.9 of the Purchase Agreement.


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<PAGE>

          "Letters  of Credit"  shall mean all  letters  of credit  under  which
     Borrower  is  a  beneficiary,   issued  in  connection  with  the  sale  or
     distribution  of Products,  now existing or  hereafter  arising,  including
     without  limitation the letters of credit listed on Schedule I hereto,  and
     all amendments,  renewals,  modifications,  restatements  and extensions of
     such letters of credit,  in an aggregate amount not to exceed the principal
     amount due and owing under the Convertible Notes outstanding at any time.

          "Permitted Junior Liens" shall mean the security  interests granted by
     Borrower to secure payment of the Crestar Debt, provided that such security
     interests  have been  subordinated  to the  security  interests  granted to
     Pledgee and Lenders  under this Security  Agreement in a manner  reasonably
     satisfactory to Pledgee.

          "Proceeds"  shall mean "proceeds," (as such term is defined in Section
     9-306 of the UCC) and, in any event, shall include, without limitation, (i)
     any and all  proceeds  of any  insurance,  indemnity,  warranty or guaranty
     payable  to  Borrower  from  time  to  time  with  respect  to  any  of the
     Collateral,  (ii) any and all payments (in any form whatsoever) made or due
     and  payable  to  Borrower  from  time  to  time  in  connection  with  any
     requisition,  confiscation,  condemnation,  seizure or forfeiture of all or
     any part of the Collateral by any governmental body,  authority,  bureau or
     agency (or any person  acting under color of  governmental  authority)  and
     (iv) any and all other  amounts from time to time paid or payable  under or
     in connection with any of the Collateral.

          "Secured Obligations" shall mean (i) all indebtedness, obligations and
     liabilities  of Take-Two to Secured  Parties under the Purchase  Agreement,
     the Notes and the other  Financing  Documents,  now  existing or  hereafter
     arising, whether direct, indirect,  related,  unrelated, fixed, contingent,
     liquidated,  unliquidated,  joint,  several or joint and several,  (ii) all
     accrued but unpaid  interest on any of the  indebtedness  described  in (i)
     above,  (iii) all  obligations  of Borrower or Take-Two to Secured  Parties
     under any documents  evidencing,  securing,  governing and/or pertaining to
     all or any part of the indebtedness  described in (i) and (ii) above,  (iv)
     all costs and expenses incurred by Pledgee or Secured Parties in connection
     with  the  collection  and  administration  of  all  or  any  part  of  the
     indebtedness and obligations  described in (i), (ii) and (iii) above or the
     protection or preservation of, or realization upon, the collateral securing
     all or any part of such  indebtedness  and obligations,  including  without
     limitation all reasonable attorneys' fees and (v) all renewals, extensions,
     modifications  and  rearrangements  of  the  indebtedness  and  obligations
     described in (i), (ii), (iii) and (iv) above.

          "Secured Parties" means each of the Lenders and any subsequent holders
     of the Notes.

          "Security  Agreement" shall mean this Security Agreement,  as the same
     may from time to time be amended,  modified or supplemented and shall refer
     to this Security  Agreement as in effect of the date such reference becomes
     operative.


- --------------------------------------------------------------------------------
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(Inventory Management Systems, Inc.)



<PAGE>

          "UCC" shall mean the  Uniform  Commercial  Code as the same may,  from
     time to time, be in effect in the State of New York; provided,  however, in
     the event that, by reason of mandatory provisions of law, any or all of the
     attachment,  perfection  or priority of Lender's  security  interest in any
     Collateral  is governed by the  Uniform  Commercial  Code as in effect in a
     jurisdiction  other than the State of New York,  the term "UCC"  shall mean
     the Uniform  Commercial  Code as in effect in such other  jurisdiction  for
     purposes of the provisions  hereof relating to such attachment,  perfection
     or priority and for purposes of definitions related to such provisions.

     2. Grant of Security  Interest.  As collateral  security for the prompt and
complete  payment  and  performance  when due  (whether at stated  maturity,  by
acceleration or otherwise) of all the Secured  Obligations and to induce Lenders
to enter into the Purchase  Agreement  and to purchase  the Notes in  accordance
with the terms thereof,  Borrower hereby assigns, conveys,  mortgages,  pledges,
hypothecates  and  transfers  to Pledgee  (on behalf of and as agent for Secured
Parties) and Secured Parties,  and hereby grants to Pledgee (on behalf of and as
agent for Secured  Parties) and Secured  Parties a security  interest in, all of
Borrower's  right,  title and  interest in, to and under the  following  (all of
which being hereinafter collectively called the "Collateral"):

          (i)  all Letters of Credit,  including without  limitation all Letters
               of Credit  delivered  to Lender  pursuant  to Section  3.9 of the
               Purchase Agreement;

          (ii) all Accounts of Borrower;

          (iii) all Contracts of Borrower;

          (iv) all Documents of Borrower;

          (v)  all General Intangibles of Borrower;

          (vi) all rights of  Borrower  in and to the  Lockbox  Account  and all
               amounts deposited therein; and

         (vii) to the extent not  otherwise  included,  all  Proceeds of each of
               the  foregoing  and  all   accessions   to,   substitutions   and
               replacements  for, and rents,  profits and product of each of the
               foregoing.

     3. Rights of Pledgee; Limitations on Pledgee's Obligations.

     (a) It is  expressly  agreed  by  Borrower  that,  anything  herein  to the
contrary  notwithstanding,  Borrower  shall  remain  liable  under  each  of its
Contracts  to observe and  perform  all the  conditions  and  obligations  to be
observed and  performed by it thereunder  and Borrower  shall perform all of its
duties and  obligations  thereunder,  all in accordance with and pursuant to the
terms and  provisions of each such Contract.  Pledgee and Secured  Parties shall
not have any obligation or liability  under any Contract by reason of or arising
out of this Security Agreement or the granting to


- --------------------------------------------------------------------------------
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(Inventory Management Systems, Inc.)



<PAGE>

Pledgee and  Secured  Parties of a security  interest  therein or the receipt by
Pledgee or any Secured  Party of any payment  relating to any Contract  pursuant
hereto,  nor shall  Pledgee or any Secured Party be required or obligated in any
manner to  perform  or  fulfill  any of the  obligations  of  Borrower  under or
pursuant to any Contract,  or to make any payment,  or to make any inquiry as to
the nature or the  sufficiency of any payment  received by it or the sufficiency
of any  performance  by any party under any Contract,  or to present or file any
claim,  or to take any  action to  collect or  enforce  any  performance  or the
payment of any amounts  which may have been assigned to it or to which it may be
entitled at any time or times.

     (b) Pledgee authorizes  Borrower to collect its Accounts provided that such
collection is performed in a prudent and businesslike  manner,  and Pledgee may,
after the  earlier to occur of (x) January 1, 1998 or (y) the  occurrence  of an
Event of Default or Lockbox Event which is continuing,  without notice, limit or
terminate  said  authority  at any  time.  After the  occurrence  of an Event of
Default or Lockbox Event, all Proceeds of such collections, when first collected
by Borrower,  received in payment of any  Accounts in which  Pledgee and Secured
Parties have been granted a security interest herein or on account of any of its
Contracts  in which  Pledgee and Secured  Parties  have been  granted a security
interest herein,  shall be promptly  deposited by Borrower in precisely the form
received (with all necessary  endorsements)  in the Lockbox  Account  subject to
withdrawal by Pledgee only, as  hereinafter  provided,  and until so turned over
shall be deemed to be held in trust by Borrower for Pledgee and Secured  Parties
and shall not be commingled  with  Borrower's  other funds or  properties.  Such
Proceeds,  when deposited,  shall continue to be collateral  security for all of
the Secured  Obligations and shall not constitute  payment thereof until applied
as  hereinafter  provided.  Pledgee may at any time apply all or any part of the
funds on deposit in the Lockbox  Account to the  principal  of or interest on or
both in  respect  of any of the  Secured  Obligations  in  accordance  with  the
provisions  of Section  8(d)  hereof and any part of such  funds  which  Pledgee
elects not so to apply and deemed not  required as  collateral  security for the
Secured Obligations shall be paid over from time to time by Pledgee to Borrower.
If an Event of  Default  has  occurred  and is  continuing,  at the  request  of
Pledgee,  Borrower  shall  deliver to Pledgee all original  and other  documents
evidencing  and relating to the  performance  of labor or service  which created
such Accounts,  including,  without  limitation,  all original  purchase orders,
invoices and shipping  receipts;  and,  prior to the  occurrence  of an Event of
Default,  Borrower shall deliver  photocopies thereof to Pledgee at its request.
Borrower  shall  maintain  the Lockbox  Account in effect at all times after its
establishment.

     (c) Pledgee may at any time, upon the occurrence and during the continuance
of any Event of Default,  after first notifying  Borrower of its intention to do
so, notify Account  Debtors of Borrower and parties to the Contracts of Borrower
that the  Accounts  and the right,  title and  interest of Borrower in and under
such  Contracts  have been assigned to Pledgee and that  payments  shall be made
directly to Pledgee.  Upon the request of Pledgee,  Borrower will so notify such
Account Debtors and parties to such  Contracts.  After the occurrence and during
the continuance of an Event of Default,  Pledgee may at any time in its own name
or in the name of others  communicate  with such Account  Debtors and parties to
such  Contracts  to verify  with such  Persons  to  Pledgee's  satisfaction  the
existence, amount and terms of any such Accounts or Contracts.


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<PAGE>

     (d) Upon  reasonable  prior notice to Borrower  (unless an Event of Default
has occurred and is continuing,  in which case no notice is necessary),  Pledgee
shall have the right to make test  verifications  of the  Accounts  through  any
medium that it  considers  advisable,  and  Borrower  agrees to furnish all such
assistance  and  information  as Pledgee may  reasonably  require in  connection
therewith.  Prior to the occurrence and during the  continuation  of an Event of
Default,  such verification shall be in Borrower's name. Borrower at its expense
will prepare and deliver to Pledgee,  upon Pledgee's request made not more often
than monthly,  the following reports:  (i) a reconciliation of all its Accounts,
(ii) an  aging  of all its  Accounts,  (iii)  trial  balances,  and  (iv) a test
verification of such Accounts as Pledgee may request.

     (e) Pledgee shall at any time  (irrespective of the occurrence of any Event
of Default) have the exclusive  right to draw under the letters of credit listed
on Schedule I hereto in accordance with their  respective  terms. At the request
of Pledgee, Borrower shall provide to Pledgee, immediately after the same become
available, any and all invoices,  packing lists, bills of lading,  certificates,
instruments  and other  documents  necessary in the sole  judgment of Pledgee to
permit or facilitate such draws.

     4. Representations and Warranties.  Borrower hereby represents and warrants
that:

     (a) Except for the security  interest  granted to Pledgee  pursuant to this
Security  Agreement and Permitted Junior Liens,  Borrower is or will be the sole
owner of each item of the  Collateral  in which it  purports to grant a security
interest hereunder,  having good and marketable title thereto, free and clear of
any and all liens,  security interests or other encumbrances.  No amount payable
under or in  connection  with any of its Accounts or Contracts  are evidenced by
instruments which have not been delivered to Pledgee.

     (b)  No  effective  security  agreement,  financing  statement,  equivalent
security or lien instrument or continuation  agreement  covering all or any part
of the Collateral is on file or of record in any public  office,  except such as
may have been filed by  Borrower in favor of Pledgee  pursuant to this  Security
Agreement or filed in connection with Permitted Junior Liens.

     (c) Upon the filing of financing statements in the form of Exhibit A hereto
describing the items or types of Collateral as to which  security  interests may
be  perfected  by the  filing  of a  financing  statement  under  the UCC in the
jurisdictions  listed on Schedule  II hereto and the  delivery to Pledgee of the
original letters of credit listed on Schedule I hereto,  this Security Agreement
shall be  effective  to create and  perfect a valid and  continuing  lien on and
perfected  security interest in such Collateral with respect to which a security
interest  may be  perfected  by filing or the  obtaining  of  possession  of the
Collateral pursuant to the UCC in favor of Pledgee,  prior to all other security
interests  (other  than the  security  interests  granted to Pledgee  under this
Security  Agreement and Permitted  Junior Liens),  and is enforceable as such as
against  creditors of and  purchasers  from  Borrower.  All action  necessary or
desirable  to protect and  perfect  such  security  interest in each item of the
Collateral has been duly taken.


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     (d) The address of  Borrower's  principal  place of business  and the place
where its records  concerning  the  Collateral are kept is set forth on Schedule
III hereto,  and Borrower  will not change such  principal  place of business or
remove such records unless it has taken such action as is necessary to cause the
security  interest of Pledgee in the  Collateral  to  continue to be  perfected.
Borrower will not change its principal  place of business or the place where its
records  concerning  the Collateral is kept without giving 30 days prior written
notice thereof to Pledgee.

     (e) The amount  represented  by  Borrower  to Pledgee  from time to time as
owing by each  Account  Debtor  or by all  Account  Debtors  in  respect  of the
Accounts will at such time be the correct  amount  actually and  unconditionally
owing by such Account Debtors thereunder.

     (f) Each of the letters of credit  listed on Schedule I hereto  constitutes
the legal,  valid and  binding  obligation  of the issuer  thereof,  enforceable
against  it in  accordance  with its  terms.  Borrower  has  taken  all  actions
necessary  to provide for the  transfer  to Pledgee of all its right,  title and
interest in, to and under the letters of credit  listed on Schedule I hereto and
Pledgee has the right to draw under such  letters of credit in  accordance  with
their respective  terms.  Such transfers are enforceable  against the issuers of
such letters of credit and creditors of Borrower.

     5.  Covenants.  Borrower  covenants  and agrees with  Pledgee that from and
after the date of this Security Agreement and until the Secured  Obligations are
fully satisfied:

     (a) Further Documentation; Pledge of Instruments. At any time and from time
to time,  upon the  written  request  of  Pledgee,  and at the sole  expense  of
Borrower,  Borrower  will promptly and duly execute and deliver any and all such
further  instruments  and documents and take such further  action as Pledgee may
reasonably deem necessary to obtain the full benefits of this Security Agreement
and of the rights and powers  herein  granted,  including,  without  limitation,
using its best  efforts  to secure  all  consents  and  approvals  necessary  or
appropriate for the assignment to Pledgee of any Contract held by Borrower or in
which  Borrower  has any  rights  not  heretofore  assigned,  the  filing of any
financing or continuation statements under the UCC with respect to the liens and
security  interests  granted  hereby and  transferring  Collateral  to Pledgee's
possession  (if a security  interest  in such  Collateral  can be  perfected  by
possession).  Borrower also hereby authorizes Pledgee to file any such financing
or  continuation  statement  without  the  signature  of  Borrower to the extent
permitted by applicable law. A photocopy of this Security Agreement may be filed
as a financing statement.  If any amount payable under or in connection with any
of  the  Collateral  shall  be or  become  evidenced  by  any  instrument,  such
instrument shall be immediately pledged to Pledgee hereunder,  and shall be duly
endorsed in a manner satisfactory to Pledgee and delivered to Pledgee.

     (b) Maintenance of Records. Borrower will keep and maintain at its own cost
and expense  satisfactory  and complete  records of the  Collateral,  including,
without  limitation,  a record of all payments  received and all credits granted
with respect to the Collateral and all other dealings with the  Collateral.  For
Pledgee's  further  security,  Borrower agrees that Pledgee shall have a special
property  interest  in all of  Borrower's  books and records  pertaining  to the
Collateral and, upon the occurrence and during the  continuation of any Event of
Default,  Borrower  shall  deliver


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and turn over any such books and records to Pledgee or to its representatives at
any time on demand of Pledgee.  Prior to the  occurrence  of an Event of Default
and  upon   reasonable   notice  from   Pledgee,   Borrower   shall  permit  any
representative  of Pledgee to inspect  such books and  records  upon  reasonable
notice and during normal business hours, and will provide photocopies thereof to
Pledgee.

     (c) Indemnification.  In any suit,  proceeding or action brought by Pledgee
or any Secured  Party  relating  to any  Account or  Contract  for any sum owing
thereunder,  or to enforce any  provision of any Account or  Contract,  Borrower
will save,  indemnify  and keep Pledgee and Secured  Parties  harmless  from and
against all expense,  loss or damage suffered by reason of any defense,  setoff,
counterclaim,  recoupment  or reduction of liability  whatsoever  of the obligor
thereunder,  arising out of a breach by Borrower of any obligation thereunder or
arising out of any other agreement,  indebtedness or liability at any time owing
to, or in favor of, such obligor or its successors  from Borrower,  and all such
obligations of Borrower shall be and remain enforceable against and only against
Borrower and shall not be enforceable against Pledgee or any Secured Party.

     (d)  Compliance  with Laws,  etc.  Borrower  will  comply,  in all material
respects, with all acts, rules,  regulations,  orders, decrees and directions of
any governmental authority,  applicable to the Collateral or any part thereof or
to the operation of Borrower's business;  provided,  however,  that Borrower may
contest any act, regulation, order, decree or direction in any reasonable manner
which  shall  not,  in the  reasonable  opinion  of  Pledgee,  adversely  affect
Pledgee's  rights  hereunder  or  adversely  affect  the first  priority  of its
security interest in the Collateral.

     (e) Payment of Obligations.  Borrower will pay promptly when due all taxes,
assessments and governmental charges or levies imposed upon the Collateral.

     (f)  Compliance  with Terms of  Accounts,  etc.  Borrower  will perform and
comply with all  obligations  in respect of Accounts and Contracts and all other
agreements to which it is a party or by which it is bound.

     (g) Limitation on Liens on Collateral.  Borrower will not create, permit or
suffer to exist,  and will  defend the  Collateral  against  and take such other
action  as is  necessary  to  remove,  any  lien,  security  interest  or  other
encumbrance on the Collateral  except for Permitted  Liens,  and will defend the
right,  title and interest of Pledgee in and to any of  Borrower's  rights under
the Accounts,  Contracts,  Documents and General Intangibles and to the Proceeds
thereof against the claims and demands of all Persons whomsoever.

     (h) Limitations on Modifications of Accounts,  etc. Upon the occurrence and
during the  continuation  of any Event of Default,  Borrower  will not,  without
Pledgee's prior written  consent,  grant any extension of the time of payment of
any of the Accounts,  compromise,  compound or settle the same for less than the
full  amount  thereof,  release,  wholly or partly,  any  Person  liable for the
payment  thereof,   or  allow  any  credit  or  discount   whatsoever   thereon.


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     (i) Limitations on Disposition.  Borrower will not sell, lease, transfer or
otherwise dispose of any of the Collateral except,  subject to the provisions of
this  Agreement,  for the  performance  of Contracts  and the  collection of its
Accounts in the ordinary course of its business.

     (j) Further Identification of Collateral.  Borrower will if so requested by
Pledgee furnish to Pledgee, as often as Pledgee reasonably requests,  statements
and schedules  further  identifying and describing the Collateral and such other
reports in connection with the Collateral as Pledgee may reasonably request, all
in reasonable detail.

     (k) Notices.  Borrower  will advise  Pledgee  promptly,  after it learns of
same,  in  reasonable  detail,  (i) of any  material  lien,  security  interest,
encumbrance or claim made or asserted  against any of the Collateral  other than
Permitted  Liens,  (ii)  of  any  material  change  in  the  composition  of the
Collateral,  and (iii) of the  occurrence  of any other event which would have a
material  adverse  effect on the  aggregate  value of the  Collateral  or on the
security interests created hereunder.

     (l) Right of  Inspection.  Upon  reasonable  notice to Borrower  (unless an
Event  Default  has  occurred  and is  continuing,  in which  case no  notice is
necessary),  Pledgee  shall at all times have full and free access during normal
business  hours and upon  reasonable  notice to all the  books and  records  and
correspondence of Borrower,  and Pledgee or its  representatives may examine the
same, take extracts therefrom and make photocopies  thereof, and Borrower agrees
to render to Pledgee,  at Borrower's  cost and expense,  such clerical and other
assistance as may be reasonably requested with regard thereto.

     (m) Continuous  Perfection.  Borrower will not change its name, identity or
corporate structure in any manner which might make any financing or continuation
statement filed in connection  herewith seriously  misleading within the meaning
of Section 9-402 of the UCC (or any other then applicable  provision of the UCC)
unless  Borrower  shall have given Pledgee at least 30 days prior written notice
thereof  and shall  have taken all  action  (or made  arrangements  to take such
action substantially simultaneously with such change if it is impossible to take
such action in advance)  necessary or  reasonably  requested by Pledgee to amend
such financing  statement or continuation  statement so that it is not seriously
misleading.

     6. Pledgee's Appointment as Attorney-in-Fact.

     (a) Borrower hereby  irrevocably  constitutes and appoints  Pledgee and any
officer  or agent  thereof,  with full  power of  substitution,  as its true and
lawful  attorney-in-fact  with full irrevocable power and authority in the place
and stead of Borrower and in the name of Borrower or in its own name,  from time
to time in Pledgee's reasonable discretion,  for the purpose of carrying out the
terms of this Security Agreement,  to take any and all appropriate action and to
execute and deliver any and all documents and instruments which may be necessary
or desirable to accomplish the purpose of this Security  Agreement and,  without
limiting the  generality  of the


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foregoing,  hereby  gives  Pledgee the power and right,  on behalf of  Borrower,
without notice to or assent by Borrower to do the following:

          (i)  to ask,  demand,  collect,  receive  and  give  acquittances  and
               receipts  for any and all  moneys due and to become due under any
               Collateral  and,  in the  name of  Borrower  or its  own  name or
               otherwise,  to take  possession  of and  endorse  and collect any
               checks,  drafts, notes,  acceptances or other Instruments for the
               payment  of monies due under any  Collateral,  to access all post
               office boxes  maintained by or for Borrower for the collection of
               any of the Collateral, and to file any claim or to take any other
               action or  proceeding  in any court of law or equity or otherwise
               deemed  appropriate  by Pledgee for the purpose of collecting any
               and all such moneys due under any Collateral whenever payable and
               to file any claim or to take any other  action or  proceeding  in
               any court of law or equity or  otherwise  deemed  appropriate  by
               Pledgee for the purpose of collecting any and all such moneys due
               under any Collateral whenever payable;

          (ii) to pay or discharge  taxes,  liens,  security  interests or other
               encumbrances  levied  or  placed  on or  threatened  against  the
               Collateral,  to effect any repairs or any insurance called for by
               the terms of this  Security  Agreement and to pay all or any part
               of the premiums therefor and the costs thereof; and

          (iii)(A) to direct any party  liable for any payment  under any of the
               Collateral  to make  payment  of any and all moneys  due,  and to
               become due  thereunder,  directly to Pledgee or as Pledgee  shall
               direct;  (B) to receive  payment of and  receipt  for any and all
               moneys,  claims and other  amounts  due, and to become due at any
               time, in respect of or arising out of any Collateral; (C) to sign
               and  indorse any  invoices,  freight or express  bills,  bills of
               lading,  storage or warehouse  receipts,  drafts against debtors,
               assignments,   verifications   and  notices  in  connection  with
               accounts  and other  Documents  constituting  or  relating to the
               Collateral;  (D) to commence and prosecute any suits,  actions or
               proceedings  at  law  or in  equity  in any  court  of  competent
               jurisdiction to collect the Collateral or any part thereof and to
               enforce  any other  right in  respect of any  Collateral;  (E) to
               defend any suit,  action or proceeding  brought against  Borrower
               with  respect to any  Collateral;  (F) to settle,  compromise  or
               adjust any suit,  action or  proceeding  described  above and, in
               conjunction  therewith,  to give such  discharges  or releases as
               Pledgee may deem  appropriate;  (G) generally to sell,  transfer,
               pledge, make any agreement with respect to or otherwise deal with
               any of the


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               Collateral  as fully and  completely  as though  Pledgee were the
               absolute owner thereof for all purposes,  and to do, at Pledgee's
               option and Borrower's expense, at any time, or from time to time,
               all acts and things which Pledgee  reasonably  deems necessary to
               protect,  preserve or realize upon the  Collateral  and Pledgee's
               security interest therein,  in order to effect the intent of this
               Security  Agreement,  all as fully and  effectively  as  Borrower
               might do.

     (b)  Pledgee  agrees  that,  except  upon the  occurrence  and  during  the
continuation of an Event of Default,  it will forebear from exercising the power
of attorney or any rights granted to Lender pursuant to this Section 6. Borrower
hereby  ratifies,  to the extent permitted by law, all that said attorneys shall
lawfully do or cause to be done by virtue hereof.  The power of attorney granted
pursuant to this  Section 6 is a power  coupled  with an  interest  and shall be
irrevocable until the Secured Obligations are indefeasibly paid in full.

     (c) The  powers  conferred  on  Pledgee  hereunder  are  solely to  protect
Pledgee's  interests in the  Collateral and shall not impose any duty upon it to
exercise any such powers.  Pledgee shall be accountable only for amounts that it
actually  receives as a result of the exercise of such powers and neither it nor
any of its  officers,  directors,  employees or agents shall be  responsible  to
Borrower  for any act or  failure  to act,  except  for its or their  own  gross
negligence or willful misconduct.

     (d) Borrower  also  authorizes  Pledgee,  at any time and from time to time
upon the occurrence  and during the  continuation  any Event of Default,  (i) to
communicate  in its own name with any party to any  Contract  with regard to the
collateral  assignment of the right, title and interest of Borrower in and under
the Contracts  hereunder and other matters relating thereto and (ii) to execute,
in connection with the sale provided for in Section 8 hereof,  any endorsements,
assignments  or other  instruments of conveyance or transfer with respect to the
Collateral reasonably requested by Pledgee.

     7. Performance by Pledgee of Borrower's  Obligations.  If Borrower fails to
perform or comply with any of its agreements  contained  herein and Pledgee,  as
provided for by the terms of this Security  Agreement,  shall itself  perform or
comply, or otherwise cause performance or compliance,  with such agreement,  the
reasonable expenses of Pledgee or such Secured Party incurred in connection with
such performance or compliance,  together with interest thereon at the rate then
in effect  under the  Notes,  shall be payable  by  Borrower  to Pledgee or such
Secured Party on demand and shall constitute Secured Obligations secured hereby.

     8. Remedies, Rights Upon Default.

     (a) If any or Event of Default shall occur and be  continuing,  Pledgee may
(on behalf of and as agent for  Secured  Parties)  exercise  in  addition to all
other rights and remedies  granted to it in this  Security  Agreement and in any
other  instrument or agreement  securing,  evidencing or relating to the Secured
Obligations,  all rights and remedies of a secured party under


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the UCC.  Without limiting the generality of the foregoing,  Borrower  expressly
agrees that in any such event  Pledgee,  without  demand of performance or other
demand,  advertisement  or notice of any kind (except the notice specified below
of time and place of public or private  sale) to or upon  Borrower  or any other
Person (all and each of which demands,  advertisements and/or notices are hereby
expressly waived to the maximum extent permitted by the UCC and other applicable
law),  may  forthwith  collect,  receive,   appropriate  and  realize  upon  the
Collateral,  or any part thereof, and/or may forthwith sell, lease, assign, give
an option or options to purchase,  or sell or  otherwise  dispose of and deliver
said  Collateral  (or  contract to do so), or any part  thereof,  in one or more
parcels at public or private sale or sales, at any exchange or broker's board or
at any of Pledgee's offices or elsewhere at such prices as it may deem best, for
cash or on credit or for future delivery without  assumption of any credit risk.
Pledgee  shall have the right upon any such  public  sale or sales,  and, to the
extent  permitted by law,  upon any such private sale or sales,  to purchase the
whole or any part of said  Collateral  so sold,  free of any  right or equity of
redemption,  which  equity of  redemption  Borrower  hereby  releases.  Borrower
further  agrees,  at Pledgee's  request,  to assemble the Collateral and make it
available to Pledgee at places which Pledgee shall reasonably select, whether at
Borrower's  premises or  elsewhere.  Pledgee shall apply the net proceeds of any
such  collection,  recovery,  receipt,  appropriation,  realization  or sale, as
provided in Section 8(d) hereof,  Borrower  remaining  liable for any deficiency
remaining unpaid after such application,  and only after so paying over such net
proceeds  and after the  payment by Lender of any other  amount  required by any
provision of law,  including  Section 9-504 of the UCC, need Lender  account for
the surplus, if any, to Borrower.  To the maximum extent permitted by applicable
law,  Borrower  waives all claims,  damages,  and demands against Pledgee or any
Secured  Party  arising  out of  the  repossession,  retention  or  sale  of the
Collateral  except  such  as  arise  out  of the  gross  negligence  or  willful
misconduct of Pledgee.  Borrower agrees that the Pledgee need not give more than
ten days'  notice  (which  notification  shall be deemed  given  when  mailed or
delivered on an overnight basis,  postage prepaid,  addressed to Borrower at its
address  referred  to in  Section 12 hereof) of the time and place of any public
sale or of the time  after  which a  private  sale may take  place and that such
notice is reasonable notification of such matters.  Borrower shall remain liable
for any  deficiency if the proceeds of any sale or disposition of the Collateral
are  insufficient  to pay all amounts to which  Secured  Parties  are  entitled,
Borrower also being liable for the reasonable fees of any attorneys  employed by
Pledgee or any Secured Party to collect such deficiency.

     (b) Borrower  also agrees to pay all costs of Pledgee and Secured  Parties,
including,   without  limitation,   reasonable   attorneys'  fees,  incurred  in
connection with the enforcement of any of its rights and remedies hereunder.

     (c) Borrower hereby waives presentment,  demand,  protest or any notice (to
the maximum extent  permitted by applicable  law) of any kind in connection with
this Security Agreement or any Collateral.

     (d) The Proceeds of any sale,  disposition or other realization upon all or
any part of the  Collateral  shall be  distributed  by Pledgee in the  following
order of priorities:



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     first,  to Pledgee in an amount  sufficient  to pay in full the expenses of
Pledgee and Secured Parties in connection  with such sale,  disposition or other
realization,   including  all  reasonable  expenses,  liabilities  and  advances
incurred  or  made  by  Pledgee  in  connection  therewith,  including,  without
limitation, reasonable attorney's fees;

     second, to Pledgee or Secured Parties in an amount equal to the then unpaid
principal  of and  accrued  interest  and  prepayment  premiums,  if any, on the
Secured Obligations;

     third,  to  Pledgee  or  Secured  Parties  in an amount  equal to any other
Secured Obligations which are then unpaid; and

     finally, upon payment in full of all of the Secured Obligations,  to pay to
Borrower,  or its  representatives  or as a court of competent  jurisdiction may
direct, any surplus then remaining from such Proceeds.

     9. Limitation on Pledgee's Duty in Respect of Collateral. Pledgee shall use
reasonable  care with respect to the  Collateral in its  possession or under its
control.  Pledgee  shall not have any  other  duty as to any  Collateral  in its
possession or control or in the possession or control of any agent or nominee of
it or any  income  thereon or as to the  preservation  of rights  against  prior
parties or any other  rights  pertaining  thereto.  Upon  request  of  Borrower,
Pledgee  shall  account  for  any  moneys  received  by it  in  respect  of  any
foreclosure on or disposition of the Collateral.

     10. Reinstatement. This Agreement shall remain in full force and effect and
continue to be effective should any petition be filed by or against Borrower for
liquidation  or  reorganization,  should  Borrower  become  insolvent or make an
assignment  for the  benefit of  creditors  or should a  receiver  or trustee be
appointed  for all or any  significant  part of  Borrower's  assets,  and  shall
continue to be  effective or be  reinstated,  as the case may be, if at any time
payment and  performance of the Secured  Obligations,  or any part thereof,  is,
pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned  by any  obligee of the Secured  Obligations,  whether as a
"voidable preference," "fraudulent conveyance", or otherwise, all as though such
payment or performance had not been made. In the event that any payment,  or any
part  thereof,  is  rescinded,   reduced,  restored  or  returned,  the  Secured
Obligations  shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.

     11. Notices.  Except as otherwise provided herein,  whenever it is provided
herein that any notice, demand, request, consent, approval, declaration or other
communication  shall or may be given to or served upon any of the parties by any
other party,  or whenever  any of the parties  desires to give or serve upon any
other communication with respect to this Security  Agreement,  each such notice,
demand, request, consent, approval,  declaration or other communication shall be
given as set forth in Section  12.1 of the Purchase  Agreement  with the address
for notices for  Take-Two  set forth  therein  being the address for notices for
Borrower  under this  Security  Agreement.  The  giving of any  notice  required
hereunder may be waived in writing by the party entitled to receive such notice.
Failure or delay in delivering copies of any notice, demand,  request,  consent,
approval,


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declaration or other  communication  to the persons  designated above to receive
copies  shall in no way  adversely  affect  the  effectiveness  of such  notice,
demand, request, consent, approval, declaration or other communication.

     12.  Severability.  Any  provision  of this  Security  Agreement  which  is
prohibited or unenforceable in any jurisdiction  shall, as to such jurisdiction,
be ineffective to the extent of such  prohibition  or  unenforceability  without
invalidating  the  remaining  provisions  hereof,  and any such  prohibition  or
unenforceability   in  any   jurisdiction   shall  not   invalidate   or  render
unenforceable such provision in any other jurisdiction.

     13. No Waiver;  Cumulative Remedies.  Neither Pledgee nor any Secured Party
shall by any act,  delay,  omission or otherwise be deemed to have waived any of
its  rights  or  remedies  hereunder,  and no  waiver  shall be valid  unless in
writing,  signed by Pledgee,  and then only to the extent  therein set forth.  A
waiver by Pledgee or any Secured  Party of any right or remedy  hereunder on any
one  occasion  shall not be  construed  as a bar to any  right or  remedy  which
Pledgee or any Secured Party would otherwise have had on any future occasion. No
failure to exercise  nor any delay in  exercising  on the part of Pledgee or any
Secured  Party,  any right,  power or privilege  hereunder,  shall  operate as a
waiver thereof,  nor shall any single or partial exercise of any right, power or
privilege  hereunder  preclude  any  other or  future  exercise  thereof  or the
exercise  of any other  right,  power or  privilege.  The  rights  and  remedies
hereunder  provided are cumulative and may be exercised  singly or concurrently,
and are not  exclusive of any rights and remedies  provided by law.  None of the
terms or provisions of this Security Agreement may be waived, altered,  modified
or amended  except by an  instrument  in writing,  duly executed by Pledgee and,
where applicable, by Borrower.

     14. Successors and Assigns; Governing Law.

     (a) This Security Agreement and all obligations of Borrower hereunder shall
be binding upon the successors and assigns of Borrower, and shall, together with
the rights and remedies of Pledgee and Secured Parties  hereunder,  inure to the
benefit of Pledgee  and  Secured  Parties,  all future  holders of the Notes and
their  respective  successors  and assigns.  No sales of  participations,  other
sales,  assignments,  transfers or other dispositions of any agreement governing
or  instrument  evidencing  the Secured  Obligations  or any portion  thereof or
interest  therein  shall in any manner affect the security  interest  granted to
Pledgee and Secured Parties hereunder.

     (b) THIS  SECURITY  AGREEMENT  SHALL BE GOVERNED BY, AND BE  CONSTRUED  AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

     15. Further  Indemnification.  Borrower  agrees to pay, and to save Pledgee
and Secured Parties  harmless from, any and all liabilities  with respect to, or
resulting from any delay in paying,  any and all excise,  sales or other similar
taxes which may be payable or  determined  to be payable  with respect to any of
the Collateral or in connection  with any of the  transactions  contemplated  by
this Security Agreement.


- --------------------------------------------------------------------------------
SECURITY AGREEMENT - Page 14                                  SecAgmt Management
(Inventory Management Systems, Inc.)



<PAGE>

     16. Waiver of Jury Trial. BORROWER HEREBY WAIVES ALL RIGHT TO TRIAL BY JURY
IN ANY  ACTION OR  PROCEEDING  TO  ENFORCE  OR  DEFEND  ANY  RIGHTS OR  REMEDIES
HEREUNDER.

     17. Termination. Notwithstanding any other provision of any other Financing
Document,  at such time as (i) the entire unpaid principal  balance of the Notes
and all accrued  interest thereon have been converted in full in accordance with
Article III of the Purchase  Agreement or indefeasibly paid in full ("Payment or
Conversion in Full") and (ii) all other payment  obligations under the Notes and
the  Purchase  Agreement  due  and  owing  as of the  date of  such  Payment  or
Conversion in Full have been  indefeasibly  paid in full, this Agreement and the
security  interests  created hereby shall  terminate.  Upon  termination of this
Agreement and Borrower's written request,  Pledgee will, at Borrower's sole cost
and expense,  return to Borrower  such of the  Collateral as shall not have been
sold or  otherwise  disposed  of or  applied  pursuant  to the terms  hereof and
execute and deliver to Borrower  such  documents  as Borrower  shall  reasonably
request to evidence such termination.


                            [SIGNATURE PAGE FOLLOWS]



- --------------------------------------------------------------------------------
SECURITY AGREEMENT - Page 15                                  SecAgmt Management
(Inventory Management Systems, Inc.)



<PAGE>

     IN WITNESS  WHEREOF,  each of the parties  hereto has caused this  Security
Agreement to be executed and  delivered  by its duly  authorized  officer on the
date first set forth above.

                                        INVENTORY MANAGEMENT SYSTEMS, INC.


                                        By:  /s/  David P. Clark
                                                  ------------------------------
                                        Name:     David P. Clark
                                                  ------------------------------
                                        Title:    President
                                                  ------------------------------


Acknowledged:

HW PARTNERS, L.P., as Purchasers' Representative

By: HW Finance, L.L.C., its general partner


By:  /s/  Stuart Chasanoff
          ------------------------------
Name:     Stuart Chasanoff
          ------------------------------
Title:    Vice-President
          ------------------------------





- --------------------------------------------------------------------------------
SECURITY AGREEMENT - Page 16                                  SecAgmt Management
(Inventory Management Systems, Inc.)



<PAGE>

                                   SCHEDULE I

                            LIST OF LETTERS OF CREDIT


                                       N/A




<PAGE>

                                   SCHEDULE II

                                     FILINGS

DEBTOR             JURISDICTION           FILING OFFICE
- ------             ------------           -------------

Borrower           New York               UCC Filing Office
                                          State of New York
                                          Department of State
                                          162 Washington Avenue
                                          Albany, NY 12231

Borrower           New York               New York City Register
                                          Room 202 Surrogate's Court Building
                                          31 Chambers Street
                                          New York, New York 10007

Borrower           Virginia               State Corporation Commission

Borrower           Virginia               Chesterfield County Clerk of Court






<PAGE>

                                  SCHEDULE III

                               LOCATION OF RECORDS


               Principal Place of Business and Location of Records


                                2900 Polo Parkway
                            Richmond, Virginia 23113






<PAGE>


                                    EXHIBIT A


                           Form of Financing Statement







                            TRANSFER AGENT AGREEMENT

     THIS TRANSFER AGENT AGREEMENT (this  "Agreement"),  dated October 14, 1997,
between  TAKE-TWO  INTERACTIVE  SOFTWARE,  INC.,  a  Delaware  corporation  (the
"Company"),  and INFINITY INVESTORS  LIMITED, a Nevis, West Indies  corporation,
INFINITY EMERGING OPPORTUNITIES  LIMITED, a Nevis, West Indies corporation,  and
GLACIER CAPITAL LIMITED, a Nevis, West Indies  corporation  (being  collectively
referred  to  herein as the  "Holders")  and  American  Stock  Transfer  & Trust
Company,  the  transfer  agent for the  Company's  common  stock (the  "Transfer
Agent").

                                R E C I T A L S:

     WHEREAS,  pursuant to that certain Securities  Purchase Agreement dated the
date hereof (the "Purchase Agreement") by and among the Company and the Holders,
the Company  agreed to issue to the Holders (1) $4,200,000  aggregate  principal
amount of 10% senior, secured convertible notes (the "Convertible Notes"), which
are convertible, at the option of the Holders, into shares of common stock, $.01
par value per share,  of the Company (the "Common  Stock") (such shares issuable
upon such  conversion  being referred to as the "Shares");  (2) 50,000 shares of
Common Stock (the "Grant Shares");  and (3) Common Stock Purchase  Warrants (the
"Warrants") exercisable for 250,000 additional shares of Common
 Stock; and

     WHEREAS,  the  Company  and the  Holders  have  agreed  to enter  into this
Agreement  with the Transfer Agent to (i) facilitate the closing of the Purchase
Agreement (the "Closing" or "Closing Date", as applicable),  (iii) provide for a
system  of  accounting  for  the  Convertible  Notes  and  (iv)  facilitate  the
conversion  of the  Convertible  Notes and  issuance  of the  Shares  associated
therewith.

     NOW, THEREFORE, in consideration of the foregoing, the parties hereby agree
as follows:

     1. Closing.  The Transfer  Agent hereby agrees to act as an escrow agent to
facilitate the Closing as follows:

     (a) On the  Closing  Date,  the Holders  shall wire  transfer to an account
designated by the Transfer Agent (x) $4,032,000, representing the purchase price
applicable to the  Convertible  Notes (the "Purchase  Price"),  less (y) $25,000
(minus any portion thereof  previously paid) (the  "Reimbursement  Fee") and the
Company shall deliver to the Transfer  Agent the  Convertible  Notes,  the Grant
Shares  and the  Warrants  to be issued in the names of the  Holders  and in the
amounts as set forth on ---- Schedule I hereto.  The Transfer  Agent may, at its
discretion,  confirm the authenticity of the Convertible  Notes and the Warrants
by  transmitting  a copy of same in the form  received  from the  Company  to HW
Partners,  L.P.,  on behalf of the Holders or its  counsel,  for written or oral
verification as to the form thereof.


- --------------------------------------------------------------------------------
TRANSFER AGENT AGREEMENT - Page 1
(Take-Two Interactive Software, Inc.)



<PAGE>


     (b)  Immediately  following  such  deliveries the Transfer Agent shall wire
transfer  to the  Company  such funds less the Whale  Fee,  which  shall be paid
directly to Whale.

     (c)  Contemporaneous  with the transfer of funds as described in Subsection
(b) above,  the  Transfer  Agent  shall (i) hold the  Convertible  Notes for the
benefit of the respective  Holders,  as hereafter described and (ii) deliver the
Grant Shares and Warrants to the Holders at the address(es) set forth herein.

     (d) Notwithstanding  the foregoing,  by joint written agreement the Holders
and the Company may agree to effect the Closing  (either  partially or entirely)
without using the services of the Transfer Agent. In such event, (i) the Holders
shall wire the Purchase Price, less the  Reimbursement Fee to the Company,  (ii)
the Company shall deliver the original  Grant Shares and Warrants to the Holders
or their designee,  and (iii) the Company shall deliver the Convertible Notes to
the  Transfer  Agent to be held for the benefit of the  Holders  pursuant to the
terms of this Agreement.

     2. Ownership of Convertible Notes.  Record and beneficial  ownership of the
Convertible  Notes  shall  remain in the name of the  Holders  (unless and until
transferred  pursuant to the terms  thereof,  with written notice thereof to the
Transfer Agent). Any transfer or purported transfer of the Convertible Notes (a)
not made  pursuant to the terms of the  Convertible  Notes and (b) not  properly
noticed to the Transfer  Agent shall be null and void ab initio and shall not be
given effect  thereto by the  Transfer  Agent.  The Transfer  Agent shall not be
required to acknowledge any transfer of the Convertible Notes unless accompanied
by written  confirmation  thereof from the Holders. The wire transfer account of
each Holder is as set forth on Schedule 2 attached  hereto.  The address of each
Holder is as set forth in Section 8 hereof.

     3. Paying  Agent.  The  Transfer  Agent  shall act as paying  agent for the
Convertible  Notes.  Accordingly,  all payments of interest or principal amounts
required of the Company  related to the  Convertible  Notes shall be made to the
Transfer  Agent for the account  and benefit of the holders of such  Convertible
Notes as  registered  on the books of the Transfer  Agent (each,  a  "Registered
Holder"). Upon the receipt of any such payment of interest or principal amounts,
in cash, the Transfer Agent shall promptly wire transfer such sum to the account
of the  Registered  Holders as  reflected  on the books of the  Transfer  Agent.
Notwithstanding the foregoing,  the Holders may, at their option,  authorize the
Company to directly pay to the Holders all sums due and owing on the Convertible
Notes.  If the Holders so elect,  the Company  shall notify the  Transfer  Agent
(with a copy thereof to the Holders) of the amount of such payment. Upon receipt
of such notice, which has been confirmed in writing by the Holders, the Transfer
Agent shall make all appropriate  entries on the Accounting Ledger (as hereafter
defined).

     4. Accounting  Agent.  The Transfer Agent shall act as the accounting agent
of the Company and the  Registered  Holders and shall  establish and maintain an
accounting  ledger for the  Convertible  Notes (the  "Accounting  Ledger").  The
Transfer Agent shall credit (reduce) the outstanding  balance of the Convertible
Notes by all (i) payments of principal  and interest  made by the Company to the
Transfer Agent as paying agent as required pursuant to Section 3 above, and (ii)
by the appropriate  amount upon delivery of Shares to the applicable  Registered
Holder  following  receipt of a Notice of  Conversion  (as  defined in Section 5
below).  At such time as the


- --------------------------------------------------------------------------------
TRANSFER AGENT AGREEMENT - Page 2
(Take-Two Interactive Software, Inc.)



<PAGE>

balance of the  Convertible  Notes,  as reflected on the Account  Ledger is zero
following the procedures  described in this Agreement,  the Transfer Agent shall
return  such  convertible  Notes  to  the  Company  marked  "paid  in  full"  or
"cancelled."

     5. Issuance of Converted Shares.

     (a)  Consistent  with each  Convertible  Note, in order to convert all or a
portion of a  Convertible  Note into Shares,  a Registered  Holder shall deliver
written notice (each, a "Notice of  Conversion"),  in the form prescribed by the
Convertible Notes, to the Transfer Agent for the portion of the Convertible Note
that it elects to so  convert  and a  calculation  of the number of Shares to be
issued upon such  conversion.  Upon  receipt by the  Transfer  Agent of any such
Notice of  Conversion  (including  receipt via  facsimile)  from any  Registered
Holder,  the  Transfer  Agent shall  immediately  deliver a copy  thereof to the
Company,  via facsimile,  requesting the Company to confirm the number of Shares
to be issued to Registered  Holder in connection  therewith.  The Company shall,
within two (2)  Business  Days (as  defined in the  Purchase  Agreement)  of the
receipt  thereof,  in good faith  confirm or dispute  the number of Shares to be
issued to the  Registered  Holder,  providing  written  notice (with  supporting
calculations  and related  information)  thereof via  facsimile  to the Transfer
Agent and the  Registered  Holder  (the  "Company  Notice").  In any event,  the
Company  shall  include in the Company  Notice  that  number of Shares  which it
believes, in good faith, are in fact issuable upon conversion of the Convertible
Note (the  "Minimum  Number").  In the event the Company  confirms the number of
Shares to be so issued,  it shall,  as part of the  Company  Notice,  direct the
Transfer Agent to issue such Shares. In the event the Company fails to deliver a
Company Notice or disputes the number of Shares to be so issued, the Company and
the Registered  Holder shall  immediately,  in good faith,  seek to resolve such
dispute.

     (b) The Transfer Agent shall not be required to issue any shares unless and
until receipt  (including  via  facsimile) of (i) written notice from either (x)
the Company,  confirming the number of Shares to be issued or (y) the Registered
Holder and the Company, setting forth the number of Shares to be issued, or (ii)
a final nonappealable order of a court of competent  jurisdiction  directing the
Transfer  Agent to issue a  specified  number  of  Shares.  Notwithstanding  the
foregoing,  each Holder  expressly  reserves all rights and remedies against the
Company for the failure of the Company to confirm to the  Transfer  Agent in any
applicable  Company  Notice  the  number  of Shares  issuable  as set forth in a
properly completed and accurate Notice of Conversion.

     (c) Reference is hereby made to that certain  Registration Rights Agreement
appended to the Purchase Agreement.  At such time as the Registration  Statement
as  contemplated  therein has been  declared  effective  by the  Securities  and
Exchange  Commission  covering  the  resale of the Shares  held by a  particular
Registered  Holder,  the Company shall cause its legal counsel to deliver to the
Transfer  Agent  an  opinion  to the  effect  that  Shares  may be  sold by such
Registered  Holder  pursuant to such  Registration  Statement with the purchaser
thereof receiving share certificates,  without restrictive legend,  provided the
Transfer  Agent  has  received  confirmation  associated  therewith,  in a  form
customarily utilized by the applicable registered broker/dealer substantially to
the effect that the prospectus delivery requirements have been satisfied. In the
event that, at any time, the Registration Statement ceases to be effective,  the
Company or its legal counsel shall immediately deliver written notice thereof to
the Transfer  Agent and the Registered  Holders  stating that the opinion of the
Company's  legal  counsel  may no longer be relied  upon by


- --------------------------------------------------------------------------------
TRANSFER AGENT AGREEMENT - Page 3
(Take-Two Interactive Software, Inc.)



<PAGE>

the Transfer  Agent (unless and until an additional or amended,  as  applicable,
Registration  Statement is so declared  effective with an  accompanying  opinion
from the Company's legal counsel).  Upon the receipt of any Notice of Conversion
while  the  Registration   Statement  is  effective,   the  share   certificates
representing  the Shares  described  above  shall be bear a  restrictive  legend
unless the  Registered  Holder,  either in  connection  with the delivery of the
Notice of  Conversion or  thereafter,  delivers  written  notice to the Transfer
Agent,  the Company and its counsel  (including  notice via  telecopy)  that the
Shares have been sold by the  Registered  Holder  pursuant to such  Registration
Statement,  whereupon the Transfer Agent shall issue share  certificates  to the
purchaser thereof without restrictive legend.

     (d) Each time a payment of principal is recorded in the  Accounting  Ledger
(whether by virtue of a cash payment or by virtue of a conversion  into Shares),
the  Transfer  Agent may, at its option,  deliver the  Convertible  Notes to the
Company  requiring the Company to reissue  Convertible Notes in the names of the
Registered Holders with new principal balances reflecting such payment.

     6. Termination. This Agreement shall terminate promptly upon the earlier to
occur of (i) written demand by the Company and all Registered Holders or (ii) no
unpaid  balance  remains  with  respect  to  any  of  the   Convertible   Notes.
Notwithstanding the foregoing,  the Transfer Agent may terminate its obligations
under this  Agreement at such time as the Transfer Agent no longer serves as the
Transfer  Agent for the Company's  Common Stock,  by delivery of written  notice
thereof to the Registered Holders and the Company. Upon delivery of such notice,
the Transfer Agent shall deliver the original  Convertible Notes to HW Partners,
L.P.,  on  behalf  of all  Registered  Holders,  together  with  a  copy  of the
Accounting  Ledger  (with  corresponding   copies  delivered  to  the  Company).
Immediately thereafter, HW Partners, L.P., as representative of the Holders, and
the Company shall, in good faith,  attempt to establish an agreement  similar to
this Agreement with the Company's new stock transfer agent.

     7. Fees.  The Company hereby agrees to pay the Transfer Agent for customary
fees charged for all services rendered hereunder.

     8.  Notices.  Any  notice or demand to be given or that may be given  under
this  Agreement  shall be in writing and shall be (a)  delivered by hand, or (b)
delivered through or by expedited mail or package service, or (c) transmitted by
telecopy,  in each case with personal  delivery  acknowledged,  addressed to the
parties as follows.  Each such notice or demand shall be effective  (i) if given
by  telecopy,  when  such  telecopy  is  transmitted  to the  telecopier  number
specified in this Agreement, (ii) if given by any other means, when delivered at
the addressed as specified herein.

         As to the Company:              Take-Two Interactive Software, Inc.
                                         575 Broadway, 6th Floor
                                         New York, New York 10012
                                         Fax:
                                         Attn: Mr. Ryan A. Brant


- --------------------------------------------------------------------------------
TRANSFER AGENT AGREEMENT - Page 4
(Take-Two Interactive Software, Inc.)



<PAGE>


         With a copy to:               HW Partners, L.P.
                                       1601 Elm Street
                                       4000 Thanksgiving Tower
                                       Dallas, Texas75201
                                       Fax: 214/720-1662
                                       Attn: Stuart Chasanoff, Esq.

         As to the Holders:            At a registered address which the Holders
                                       shall provide from time to time.

         With a copy to:               HW Partners, L.P.
                                       1601Elm Street
                                       4000 Thanksgiving Tower
                                       Dallas, Texas  75201
                                       Telephone:  (214) 720-1689
                                       Fax: (214) 720-1662
                                       Attn: Stuart Chasanoff, Esq.

         As to the Transfer
         Agent:                        American Stock Transfer & Trust Company
                                       2601 15th Avenue
                                       Brooklyn, New York 11219
                                       Fax: 718/331-1852
                                       Attn: Herbert J. Lemmer

     9.  Noncontravention.  The Company agrees that it will not at any time take
any action or undertake any activity  that would in any way impede,  restrict or
limit the right and ability of the Registered Holders to convert the Convertible
Notes and receive Shares pursuant to the terms and provisions of this Agreement.

     10. Indemnification.  The Company agrees to indemnify and hold harmless the
Transfer  Agent,  each  officer,  director,  employee  and agent of the Transfer
Agent,  and each person,  if any,  who  controls  the Transfer  Agent within the
meaning of the  Securities Act of 1933, as amended (the "Act") or the Securities
Exchange  Act of 1934,  as amended  (the  "Exchange  Act")  against  any losses,
claims,  damages, or liabilities,  joint or several, to which it, they or any of
them,  or such  controlling  person,  may  become  subject,  under the Act,  the
Exchange  Act  or  otherwise,   insofar  as  such  losses,  claims,  damages  or
liabilities  (or actions in respect  thereof) arise out of or are based upon the
performance by the Transfer Agent of its duties  pursuant to the Agreement;  and
will  reimburse the Transfer  Agent,  and each officer,  director,  employee and
agent of the Transfer Agent, and each such controlling person for any reasonable
legal or other expenses  reasonably  incurred by it or any of them in connection
with  investigating  or defending  any such loss,  claim,  damage,  liability or
action;  provided,  however,  that the Company will not be liable in any case if
such loss, claim,  damage or liability arises out of or is based upon any action
not taken in good  faith,  or any  action or  omission  that  constitutes  gross
negligence or willful misconduct.

     Promptly after receipt by an indemnified party under this Section of notice
of the commencement of any action,  such  indemnified  party will, if a claim in
respect thereof is to be made against the Company under this Section,  notify in
writing the Company of the


- --------------------------------------------------------------------------------
TRANSFER AGENT AGREEMENT - Page 5
(Take-Two Interactive Software, Inc.)



<PAGE>

commencement  thereof,  and  failure so to notify the Company  will  relieve the
Company  from any  liability  under this Section as to the  particular  item for
which  indemnification  is then being  sought  but not from any other  liability
which it may have to any  indemnified  party. In case any such action is brought
against any indemnified  party,  and it notifies the Company of the commencement
thereof,  the  Company  will be entitled  to assume the  defense  thereof,  with
counsel selected by the Company, who shall be to the reasonable  satisfaction of
such indemnified  party. The Company shall not be liable to any such indemnified
party on account of any settlement of any claim of action  effected  without the
consent of the Company.

     11.  Governing  Law. This  Agreement  shall be governed by and construed in
accordance  with the laws of the State of New  York,  without  giving  effect to
conflicts of law rules of such jurisdiction.  Any action brought to enforce,  or
otherwise  arising  out of, this  Agreement,  shall be heard and  determined  in
either a federal or state court sitting in the State of New York.

     12. Entire Agreement;  Amendments. This Agreement, constitutes the full and
entire  understanding  of the parties with respect to the subject matter hereof.
Neither this Agreement nor any term hereof may be amended,  waived,  discharged,
or  terminated  other than by a written  instrument  signed by the party against
whom  enforcement  of any such  amendment,  waiver,  discharge or termination is
sought.

     13.   Counterparts.   This  Agreement  may  be  executed  in  one  or  more
counterparts and by facsimile signature.






                            [Signature page follows]




- --------------------------------------------------------------------------------
TRANSFER AGENT AGREEMENT - Page 6
(Take-Two Interactive Software, Inc.)



<PAGE>

     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
duly  executed by their  respective  authorized  officers,  as of the date first
above written.

                                        Take-Two Interactive Software, Inc.

                                        By:  /s/  Ryan Brant
                                                  ------------------------------
                                        Name:     Ryan Brant
                                                  ------------------------------
                                        Title:    CEO
                                                  ------------------------------

                                        Address:  575 Broadway, 6th Floor
                                                  New York, New York 10012
                                        Fax:      (212) 941-2997


                                        INFINITY INVESTORS LIMITED


                                        By:  /s/  James E. Martin
                                                  ------------------------------
                                        Name:     James E. Martin
                                                  ------------------------------
                                        Title:    Director
                                                  ------------------------------

                                        Address:   38 Hertford Street
                                                   London, England WIY 7TG
                                        Telephone: 011-44-171-355-4975
                                        Attention: J. A. Loughran


                                        INFINITY EMERGING OPPORTUNITIES
                                        LIMITED


                                        By:  /s/  James E. Martin
                                                  ------------------------------
                                        Name:     James E. Martin
                                                  ------------------------------
                                        Title:    Director
                                                  ------------------------------

                                        Address:   38 Hertford Street
                                                   London, England WIY 7TG
                                                   11-44-171-355-4975
                                                   J. A. Loughran




- --------------------------------------------------------------------------------
TRANSFER AGENT AGREEMENT - Page 7
(Take-Two Interactive Software, Inc.)



<PAGE>




                                        GLACIER CAPITAL LIMITED


                                        By:  /s/  James E. Martin
                                                  ------------------------------
                                        Name:     James E. Martin
                                                  ------------------------------
                                        Title:    President
                                                  ------------------------------

                                        Address: 38 Hertford Street
                                                 London, England WIY 7TG
                                        Fax:     011-44-171-355-4975
                                        Attn:    J. A. Loughran





           With a copy to:        HW Partners, L.P.
                                  1601Elm Street
                                  4000 Thanksgiving Tower
                                  Dallas, Texas  75201
                                  Telephone:  (214) 720-1689
                                  Fax:  (214) 720-1662
                                  Attn:  Stuart Chasanoff, Esq.

                                  AMERICAN STOCK TRANSFER &
                                  TRUST COMPANY



                                  By:  /s/  Herbert J. Lemmer
                                       -------------------------------------
                                            Herbert J. Lemmer
                                            Vice President




- --------------------------------------------------------------------------------
TRANSFER AGENT AGREEMENT - Page 8
(Take-Two Interactive Software, Inc.)